Purdue University just issued a report which claims that in a recent survey of bankers and farm managers, land values went up an average of 17% statewide in the past 12 months. Craig Dobbins, who helps conduct the survey, says that's staggering considering that drought produced drastic yield reductions.
Farming isn't just about yield – it's also about price. Limited supplies nationwide drove corn and soybean prices higher last fall. Farm incomes went up. In fact, Purdue's estimates are that farm income will still reach record levels nationwide this year.
Price seemed to trump yield in last year's attitude toward buying ground. Good land jumped the most, nearly 20% statewide. But even land rated as poor quality jumped over 14% -- after a drought – and the statewide average for poor land topped $5,000 per acre, based on the survey.
Cash rents also increased, but not as much as land values. Cash rents were up on average about 10% statewide. Howard Doster, a retired Purdue ag economist, says that's not unusual. Cash rents usually lag land values going up. However, they also lag in going down when economics switch directions. That's why he often refers to cash rent values as being 'sticky.' They're slower to adjust than land values.
So the big question now is whether big yield – if it materializes – will lead to much lower grain prices. Then, will lower prices trump big yields in finally stopping the run-up in land values?
While it seems counterintuitive, the truth is that big yields may do what disastrous yields could not do – stop the increase in land values. Corn prices are already falling to levels some farmers didn't think they would see again, although long-range ag economists have cautioned that there are no guarantees that prices can't fall, or how far they can fall.
Dobbins' best guess is that the run-up in land prices may tail off. There could even be a few corrections in value, which means a drop in price, in some areas. However, neither he nor the respondents in his survey foresee large drops in land values.
Our belief is that land values will stabilize or in cases where good land sells and neighbors want it, there may still be strong sales, as long as farm income remains high. Consider this example:
If your corn made 70 bushels per acre a year ago and you sold for $6.50 per bushel, you still brought in $455 per acre. That may have barely covered variable costs, maybe not. However, soybean income was better, and if you had crop insurance, especially revenue-based insurance, you may have wound up in decent shape.
Suppose that same average is 200 bushels per acre this year. If you sell even at $4.00 per bushel, that's $800 to work with. Some have forward contracted at higher prices. If the corn price falls too low, revenue-based crop insurance may kick in again.
The bottom line is it's understandable that farm income will still be healthy overall this year.
What hurts is there are those who won't harvest 200 bushels per acre. In a few areas hit by too much rain early, yields may be below average again. This time price won't bail them out. Crop insurance might. Otherwise, it could be a tough year.