Is Corn Fever Driving Land Prices Past Profitability?

Beefs and Beliefs

The area where I live has been spared the worst of land price inflation but it appears to be rising beyond good sense.

Published on: October 31, 2013

Well, corn fever is moving closer to my geography and I'm unsure what to think or do about it.

When I say corn fever I'm talking about the corn price boom that started with the ethanol subsidy changes in 2005 and has continued through today.

As everyone with any interest in agriculture knows it has driven farmland prices to record highs in the corn belt and that has dragged all other land values, including pasture prices, higher with it. It looks uncomfortably to me like classic land-price run-up before the fall.

Last Wednesday I went to a land lease auction for what we in Oklahoma call school lease land. At statehood in 1907 our state charter set aside one section of land in every township as land belonging to the state's schools. The proceeds from their rental and from mineral leasing goes to fund our schools.

This land was once held by individuals/families much like grazing leases on Forest Service and Bureau of Land Management land are held today. A lawsuit some years back changed that and now these properties come up for rent once every five years, although on a staggered schedule.

All leasing now is done through public auction and the public is encouraged to bid on said properties.

Because it is done at public auction I think it can be a good indicator of possible trends in ag land rental values. Here in north-central Oklahoma we are far enough from the Corn Belt and have irregular enough production that we've been sheltered a bit from rapid escalation

Some properties leased at reasonable prices for our area, meaning $14-18 per acre for native grassland and $30-$40 per acre for crop ground.

However I also saw a lot of crop ground lease for $60-70 per acre and several parcels of pasture lease for nearly $30 per acre.

These prices may sound cheap to Midwesterners but consider we are in an area with relatively thin soils, erratic rainfall and brutally hot and dry summers. Winter wheat is the main crop grown here, although some soybeans, short-season corn and some cotton are scattered through the area.

Year to year, our wheat crops normally average about 40 bushels. Native prairie pasture has long been rated in this area as 10 acres to the cow-calf unit, although those are the classic 1,000-pound cows of days gone by.

To put the situation in terms of return on investment, which to me is the ultimate and only important question, here are some rough estimates.

Let's say a half-section of grassland could support 25 cows after the wooded areas are subtracted and remaining pasture of average condition is calculated. Then we can use the long-standing national average profit of $100 per cow unit from the Livestock Marketing Information Center. That means 25 cows would return $2,500 net profit. That also suggests if the lessee gave up all profits then he or she could pay $12.80 per acre.

If the operator was really savvy and profitable, using data from Southwestern SPA database and was making profits on par with the top one-fourth of cow operations in the region, the profits would be about $175 per cow unit or $4,375 for the entire half-section. Putting all that income into rent would mean the operator could pay $13.67 per acre.

On the crop ground, let's suppose wheat stays at about $7.30 per bushel, the futures price for next July. If the ground produces average yield for my county, which is 27 acres, that's a gross income of $197 per acre. If it has a really good year and produces 40 bushels per acre that's $292 per acre gross income.

Then we must subtract costs of production from the income. I'll use Oklahoma State University's average statewide cost of production of $200 per acre. That says the average-yielding wheat for my county is produced at a loss for the average statewide cost structure. In a high production year it would clear about $90 per acre. Add income from grazing wheat pasture to either one of these and it improves profit by $100 per acre, again using OSU's statewide numbers.

However, I'd say both profit suppositions for wheat production imply a lot of risk in that $70-per-acre rental price.

I understand that most producers manage to keep costs very low to keep some form of profit rolling. I also know farmers are notorious for underestimating their costs and overestimating their profits.

To cut to the chase of my concerns, I keep remembering skyrocketing land prices and crop prices in the late 1970s and early 1980s and the bust that followed ... and I wince.