Insight to the Farmland Market

February 16, 2011

Here is another perspective on farmland values. Take a look and let us know what you think.
This article was written by:
Sara Schafer, Business and Crops Online Editor
February 4, 2011

You’ve read the stories or heard from neighbors how much good farmland is selling for these days. Can you believe it? Some ground is going for several thousand or even more than $10,000 an acre.

As your vital asset, farmland continues to gain support and worth due to many positive factors in the agricultural arena.

“Land values bottomed out in 1987 and we’ve had a long run since,” says Craig Dobbins, agricultural economist at Purdue University. “In 2009, things got a little tight. We’ve had a rise in crop prices since then. In the last six months we’ve seen a land market that was somewhat cautious to one that is right now really bullish.”

Additionally, Chris Hurt, Purdue University agricultural economist, says farmers have been optimistic lately because of the surge in grain prices. “The dollar has been very weak, since 2002. That tends to make commodity prices go up.”

With the bullish attitude right now, you should be aware of what’s driving the current farmland market. Here are some tips.

Understand the Lure of Farmland
Even during a recession, we continue to see farmland values increase, says Michael Boehlje, Purdue University agricultural economist.

Boehlje says people are motivated to buy farmland because of:

Income potential
Low interest rates
Development potential
Farmland is a portfolio asset

“High returns and low interest rates equal higher values,” he says. “From a portfolio perspective, land is a pretty attractive asset.”

Track the Key Farmland Drivers
Brent Gloy, Purdue University agricultural economist, says income, discount rate (interest rates) and expectations for income growth determine farmland values. He says higher income, lower interest rates and bigger expectations of income growth all create higher farmland values. “Today, all of those things are working for higher farmland prices,” he says.

Gloy likens the land market to a rocket ship. “We had it out on the launch pad a few years ago. Then the oil bubble popped and crop prices dropped, which took some of the steam out. I think right now we’ve got it out and are fueling it up.”

Don’t Overanalyze High-Priced Farm Sales
Boehlje says the big buzz in farmland is the sale in Iowa, where an 80-acre tract sold for $13,950/acre. But, he says, in that same county last year, a farm sold for $3,258/acre. “I think we have to be really careful about which numbers we pick out and how we determine if they are indications of the current land market.”

Gloy agrees. “The land market is a less liquid market than many of the markets we’re used to dealing with. Use caution when looking at some of those spectacular (land) prices we’ve seen.”

Look for History Lessons
Dobbins says he can easily draw comparisons between agriculture in the 1970s and 80s and the current housing situation. He says agriculture saw heavy borrowing, variable rate interest loans and a sudden change in government policy.

“Interest rates shot through the roof,” he says. “We had a whole bunch of foreclosures in agriculture and land got pushed on to the market quicker than it could be absorbed. Just like what’s happening now in the housing market. Bankers didn’t want to be land lords, so they shoved those houses onto the market.”

Dobbins’ advice: Keep an eye on government policy.