Indiana farmland values have hit an all-time high after jumping an average of 24 percent from 2010 — a rate of increase not seen since 1977.
According to the 2011 Purdue Farmland Value Survey, statewide increases ranged from 22.8 percent to 25.3 percent because of strong grain prices, low interest rates, strong farmland demand and a limited supply of farmland being brought to the market.
"With high crop demand and prices, the outlook for agriculture is very optimistic relative to other industries," said Purdue Extension agricultural economist Craig Dobbins. "As long as those strong grain profit margins continue, farmland values are likely to increase."
The survey found that the value of poor-quality farmland averaged $4,386 per acre, average-quality farmland $5,468 and top-quality farmland $6,521.
Dobbins said the trend in Indiana's farmland values was common throughout the Midwest and Eastern Corn Belt.
While the news of a strong farmland market may be good for current owners, it presents a continuing challenge to potential buyers or those who rent farmland.
"Cash rents are up about 13 to 14 percent, and those are driven by the same factors as the farmland value increases," Dobbins said. "But because lease arrangements are made up 12 to 16 months prior to harvest, it is difficult for landlords and tenants to determine an appropriate cash rent. "
Because of grain market variability and weather concerns, Dobbins said there has been increased interest by growers and landowners in lease agreements with flexibility in cash rent. In these situations, the final amount of cash rent due would be determined post-harvest.
Poses a challenge
Farmers who want to purchase farmland may also find the increasing land prices challenging. Dobbins urged potential buyers to think about the possibility of revenue declines and input cost increases before they make final decisions.
"Farmers have to think about what a farmland equity loss would do to a specific operation," he said.
While the economy remains volatile, Dobbins said farmland owners are better positioned now to handle a downturn than they were 30 years ago when agriculture struggled to deal with another financial crisis.
"It seems farmland is mostly held in financially strong hands and purchases are being made with modest borrowing," he said.
"We may see a pause or decline in farmland values, but because there is less debt against the land, such a change should not cause financial stress like in the 1980s. Of course, it depends on the amount of actual decline."
This is why Dobbins encourages farmers to do some financial stress testing of their businesses. They need to know where the business will stand if there is a decline in farmland values of 10 percent or 15 percent, or if the cash flow margin becomes negative.
"In this volatile environment, farmers not only need a Plan A, but a Plan B and maybe a Plan C," he said.
For more comments from Dobbins and a full analysis of the 2011 Purdue Farmland Values Survey, log on to the Purdue Agricultural Economics Report at http://www.agecon.purdue.edu/extension/pubs/paer/.