Which way for land values?

Most of the land market insiders who responded to a Purdue University survey said they see the growth rate in farmland values slowing over the next five years.

Indiana land values rose 24% in 2010, with poor-quality farmland valued at $4,386; average-quality farmland, $5,468; and top-quality farmland, $6,521 per acre.

About 59% of those surveyed expected farmland values to be even higher five years from now. But they expected land values only to be 12.4% higher. This translates into an average annual increase of 2.4%.

Nineteen percent of those surveyed said they expect farmland values to decline over the next five years. The average decline for this group was 11.9%.

Key Points

Most Indiana land market insiders see a slower rise in land values in the future.

About 22% see no increase in land values over the next five years.

Economist advises farmers to do financial stress test for land changes.

About 22% of the respondents said they do not expect any change in land values five years from now.

Given the change in farmland value for the past five years, no change in value over five years will be a sharp change in the trend, notes Craig Dobbins, Purdue Extension agricultural economist. What might happen that would make each group correct?

For increases

Strong demand for corn from the ethanol industry because of biofuel mandates

Strong soybean export demand

2011 U.S. corn and soybean crop that is average or below average

Moderate increases in input costs for corn and soybeans, keeping crop production margins well above historic averages

For low long-term interest rates

Little change in the amount of land available for sale

For no change or declines

Sharp decline in corn and soybean export demand

Sudden change in the U.S. policy away from providing biofuel subsidies and mandating usage levels

Sharp rise in interest rates because of a downgrade in the credit rating of U.S., government debt obligations or increased inflation fears

Exceptionally large 2011 corn and soybean crop

Sharp rise in crop input prices reducing crop production margins

Further slowing of world growth because of sovereign debt problems, including the U.S.

Strong supply response resulting from capital investments in agricultural production stimulated by high grain prices

The survey was sent to farmland managers, appraisers, brokers, ag loan officers, Extension agents, farmers and Farm Service Agency officials.

Stress test

In light of land value volatility, Dobbins encourages farmers to do some financial stress testing.

“In this volatile environment, farmers not only need a Plan A, but a Plan B and maybe a Plan C,” he says.

Source: Purdue

This article published in the September, 2011 edition of DAKOTA FARMER.

All rights reserved. Copyright Farm Progress Cos. 2011.