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Do the math before buying land

Cropland prices are going up. And, they will continue upward as long as crop prices lead the way, says Ron Plain, University of Missouri Extension agricultural economist.

“If you look in crop prices on the futures market out four years, you see a trend that supports increases,” Plain says. “Just do the math. At a corn yield last year of 153 bushels and a projected corn price of $5.30, that gives $810 worth of corn per acre. You can pay more for land.” That’s based on national averages.

“Everywhere you look, cropland prices look to be going up,” Plain says. “But, pastureland is not doing nearly as well. And recreation land, not.”

The reason is crop demand. “Corn futures are above $5 for the next four years. The nearby contracts are all saying, ‘We need more corn.’ ”

Soybean futures send the same signal, with contracts above $12 per bushel and nearby at $13. “The market says we need to plant more soybeans,” he adds. And, cotton prices are the highest in 140 years, so the U.S. needed more cotton. U.S. farmers have already planted more wheat.

“There is pressure to plow,” Plain says.

A recent report from the 10th Federal Reserve District in Kansas City puts some percentages behind the land-price rise. It surveyed bankers in its region, which includes western Missouri. On average, non-irrigated cropland was up 6.4%. That was up from an increase of 2.8% for the first quarter of last year. Irrigated cropland was up 9.6%. But pastureland was up only 4.3%.

In Missouri, Plain surveyed ag lenders who attended winter meetings in November and December. From 14 meetings, the average estimates of selling price per acre was $2,999 on nonirrigated farmland. That was up from $2,631 in 2009 and $2,548 in 2007.

The average for a fescue-pasture farm was $1,997 per acre — compared to $1,826 in 2009 and $1,921 in 2007. Upward pressure for land from livestock farmers is not there.

The weakest land prices came from the 40-acre recreational sites. That’s where people from the city buy a place to get away and possibly set a deer stand. The average from 14 locations was $1,673. That compared to $1,928 in 2007.

“When city people see neighbors losing their jobs or a family member losing a job, a getaway acreage isn’t as important,” Plain says. “They may want to sell the one they have.”

Prime property

Coffee-shop gossip was abuzz with news from northwest Iowa when a tract of farmland sold at auction for $13,000 per acre.

“Each land sale is an individual situation,” Plain says. “If two neighbors bid on an adjoining 80 acres between them, you can get some amazing prices. They’ve been looking at that land for years. They’ll say, ‘If I don’t buy now, I won’t see that land for sale again in my lifetime.’ ”

What gossip didn’t say about that Iowa land was the difference from most Missouri land. It was in a region where 300-bushel corn is grown.

“Anytime you buy land, you have to do the math,” Plain says. “Multiply the yield potential by the future expected prices of the crops to be grown.”

Then, you must realize that high land price won’t be paid for by a couple of good years. Things can change. “Interest rates are very low right now,” Plain adds. “It’s best to lock in a long-term loan at these rates. But that may be difficult to find. While you can do that for a home mortgage, it is not likely for farmland.”

More to ponder

As long as crop futures prices stay as high as they are, the ag industry is going to see higher land-price bids. “My concern is that high land price will take on a life of its own. After a few years of high prices, people won’t bother to do the math,” Plain says.

Another concern is the price of fuel and fertilizer. “If we keep $5 corn, input costs will go up fast,” he says.

So far, there is little similarity between the land boom of the 1970s that was followed by the crash in the 1980s. There is no feeling of a land rush. “The volume of sales is up some,” Plain says.

“But, likely more land will be for rent than for sale. Children and grandchildren are deciding that the land they inherited can provide a steady return. And, the land returns more than they can get by putting the sale money in CDs.”

In addition, more crop farmers realize you don’t have to own land to farm it. There will continue to be the urge to get larger, however.

“As combines continue to cost more, there will be the need to spread that cost over more acreage,” Plain says.

In winter meetings with farmers, Plain will repeatedly hit his favorite theme: “Do the math first.”

This article published in the February, 2011 edition of MISSOURI RURALIST.

All rights reserved. Copyright Farm Progress Cos. 2011.