By MICHELE F. MIHALJEVICH
Indiana Correspondent

WEST LAFAYETTE, Ind. — The value of Indiana’s farmland has likely increased over the last year and will continue to do so as long as farmers and investors have confidence in the agriculture industry, according to an agricultural economist at Purdue University.

Craig Dobbins will release the results of his latest farmland values study in July, but said last week he expects another double-digit increase for values from 2010 to 2011. In June 2010, the average price of an acre of land in the state was $4,419, up 12 percent from the previous year.

“The health of the industry is quite good. (Buyers) are fairly positive right now and they tend to think margins will remain good,” he explained. “They think owning farmland is a good investment right now.”

The increase shows the impact of high grain prices, moderate input costs and relatively low interest rates, Dobbins noted. “The growth rate is based on what people expect to happen to future returns. Expectations of future events are what drive the current market. If things play out better than expected, people are happy. If they don’t go as well as expected, people aren’t so happy.”
Values could drop “if we were to see a significant tightening of margins due to a significant drop in grain prices, or if we’d see a significant jump in input costs as we did a couple of years ago, or some combination of the two,” he stated.
An increase in interest rates could also cause values to drop a bit, he added.
Land prices are the highest they’ve ever been based on current dollar values, Dobbins said. If inflation isn’t factored, values still haven’t reached the peak of the early 1980s.

The only time the state has seen sustained periods of decreases were during the Great Depression and the mid-1980s, when land lost about 50 percent of its value, he noted. Since 1985, values in Indiana have increased 270 percent.
“In the mid-1980s, prices hit bottom and then gradually land values began to rise again,” he explained. “It took 20 years to get back to where they had been.”

Dobbins’ upcoming report will focus solely on Indiana farmland, but he expects the trend is common in other states in the Midwest, though states strong in corn and soybeans may see larger increases.

While the strong agriculture industry is a bright spot in the overall economy, Dobbins noted that actions in Washington could temper that brightness. As Congress and the president try to balance the budget, cuts in farm payments, crop insurance subsidies and ethanol subsidies could be concerns. Also, weather problems during the growing season could have an impact on values, he added.

Overall though, the news is good for current farmland owners because it shows the value of their assets is increasing and they’re getting a good return on their investment, he said.

Despite the continued rise in farmland values, farmers and investors are still in the market to buy farmland in the state, said R.D. Schrader, president of Schrader Real Estate & Auction Co., based in Columbia City, Ind.

“At auction, farmers tend to be the high bidders more than half to 75 percent of the time,” he noted. “Investors may be looking at the returns a little closer. But there continues to be a lot of competition and pressure for farmland.”
Buyers for farmland continue to outnumber sellers, and the market is still soft for developers of residential and commercial properties, he added. An increase in interest rates is a variable everyone in the industry is watching, Schrader explained, noting inflation is also a concern.

Agents with Halderman Real Estate Services in Wabash, Ind., are seeing more farmland on the market than a year ago, according to Pat Karst, the company’s vice president.

“With prices at or near an all-time high, people are thinking it’s time we just clipped the coupon and get the farm sold,” he noted. “They’re thinking it’s just time to sell. There’s a much higher risk prices will go down than potential they’ll continue to go up.

“We are seeing more buyers than sellers, and we’re seeing good demand for good quality farmland.”

Returns of 3-3.5 percent are considered good and the market is slightly below that, Karst explained. “Rents haven’t caught up with prices. Farmers won’t want to hear this, but land prices may have to come down a bit or rents will have to come up,” he said.