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Nonfarm pressure helps drive farmland prices up
By SUSAN HAYHURST
Indiana Correspondent

WEST LAFAYETTE, Ind. — Farmers and land investors continue to vie for Indiana ground even in a time of increasing cash rents and land values. Who ends up with the ground depends on several factors, said Craig Dobbins, professor of agricultural economics at Purdue University.

“Many of the same factors from 2005 are still in place for 2006,” Dobbins said. “There continues to be a limited supply of land for sale and a strong demand from both farmers and nonfarmers.

Farmers are seeking to expand the size of their business. Farmland is still viewed as a good investment by nonfarm investors, and there are still 1031 exchanges taking place. Things that are of greater concern include continued efforts to reduce government support payments and rising long-term interest rates.”

The 2005 Purdue Land Values Survey found Indiana cropland values rose for all types of land – poor, average and top quality. Poor quality land averaged $2,367 per acre, average quality land averaged $2,945 an acre and top quality land averaged $3,556 per acre. The land value increases were the highest since 1996-97, when the survey reported a statewide increase of 12-15 percent. Land quality is based on average long-term corn yield.

Land values across the state increased uniformly except in southeast Indiana, where increases were not as large.

“Indiana’s land values are also similar to surrounding states,” noted Dobbins.

Farmers watch land values closely since their livelihood is tied to land availability.

“I’m a proponent of the free enterprise system,” said Larry Gormong, who farms about 10 miles south of Terre Haute, Ind. “People can pay for land what they want. But when folks want an excellent return on investment (ROI), as in the case of cash rent, they often aren’t willing to take any risk. They want a high return regardless of the costs of inputs and crop output.”

Purdue’s study showed cash rents increased statewide $3-4 per acre, to $99 for poor quality land, $126 for average quality land and $154 for top quality land.

“There are two sources of return from an investment in farmland,” said Dobbins. “One is the annual return, represented by cash rent, and the other is the increase in land value. In the 31-year history of the survey, these values are the lowest reported. This indicates that the current market is depending more than usual on expected increases in value to provide a competitive overall rate of return.

“In general, farmland is a good investment. If we continue to see an increase in value it will remain so. The components that make up the ROI are shifting away, thus the rent decline and the growing appreciation in value. If investors pay $5,000 for an acre and think they should receive 6 percent that’s $300 for cash rent, an unrealistic figure. Rents are a lot lower relative to the cost of land. Buyers need to know that.”

Farmers have always seen buying land as a good investment and are now seeing more nonfarmers showing interest as well. Tony Wolfe, a farmer in Gibson County near Hazelton, is currently purchasing 40 acres and likes to buy land privately. He usually secures such ground for $500-$1,000 less per acre.

“I own about 325 acres and have bought it all privately,” Wolfe said. “My background in surveying and appraising land using a soil-survey book helps to know what the land is really worth. I come close to figuring its actual value. It’s important to me to establish good relationships with the folks I’m looking to buy from because I want them to talk with their family before coming to me.

“People get concerned what the economy and their investments are going to do. Investments in companies can go to zero but investing in land can never go to zero. I am a lifestyle farmer who is patient when the opportunities do come along. Come hell or high water, I’m going to farm even if it means I have to work an extra job to keep farming.”

The productivity of land and the costs farmers are facing is important to Dobbins.

“If there is not an improvement in crop prices or a reduction in costs, I expect that more farmers may conclude that rents are too high,” Dobbins said.

“As long as a landowner can easily find a tenant that will rent the farm at a cash rent equal to or higher than the current level there will not be much reduction in cash rent.”

The next farm bill and recreational landowners are also influencing land purchases. Dobbins believes, if the amount of governmental support is reduced, revenue will be reduced.

“Reduced revenue will squeeze margins more unless there is a rise in crop prices or reduction in costs,” he said. “The reduction in payments may have more impact on rents than values. My view of the world is that rents are capped by yields, prices and government payments. I think recreational buyers are looking for land in the country to call their own. There is an attachment value, especially since more people are living farther away from farms that might have been in their families.”

Dobbins predicted rising long-term interest rates will cause the increase in land values to slow.

“Higher rates will provide better alternative investments which will lower the demand for land,” he said. “It will also make the purchase of land with borrowed money more difficult.”

What encouragement can come from increasing land values and cash rents?

“First, if you own ground you’re not going to like urban encroachment but realize that land values are going up,” Dobbins said. “If you rent ground you have no control when it’s sold. You must think about how long can you survive by farming piece meal. If you are considering do you keep the farm, think about whether you know your children want to farm. If you own your land then you have leverage to keep it. If you rent the ground, think mobility for farming elsewhere.

“Second, why are you in the business of farming? Is there a reason you have to grow corn to be happy? Some people move to higher value crops because of consumer demand. That helps them maintain. Be creative. Be fleet of foot to play the game and do it successfully.”

This farm news was published in the February 8, 2006 issue of Farm World.

2/8/2006