That statement could be close to correct. The rocket ship ride in farmland values over the last five years has many investors, analysts and farmers scratching their heads as to whether this trend can continue. Those who believe there is no end to the ethanol industry are in the camp where there is no end in sight to the upper increase in farmland values. They might be right.

There are arguments on either side, however. Historically, farmland values have not gone up forever. Every real estate market goes through corrections, and odds are farmland will not be any exception. Investors were convinced there was no end to the housing market boom only two years ago. Now it will take at least three years to straighten out that mess.

No one will argue that up until this date, the upper trend in land values has been relentless. Broken down by states in the Midwest, Illinois has now taken the lead over Ohio and Indiana. Average 2005 Illinois values were up 28%, followed by another 14% increase in 2006. They are estimated to be at least another 10% higher thus far this year. Land sales in that state in the most productive areas have seen prices of $6,000/acre or more within the last couple of months. Cash rents are reaching $300 in many Illinois counties.

The identity of who buys farmland is an interesting development, and the trend might surprise some people. The chart prepared by Iowa State University shows, up until last year, the trend had been that more investors were buying farmland and fewer farmers were buying farmland. That trend has changed. In the last 12 months, over 60% of the farmland in the state of Iowa has been sold to farmers. In 2005, investors bought approximately 40% of the farmland. Now, they're down to about 35%.

Part of the reason, most likely, that some investors have backed away from the farmland market is the cutback in tax-free (1031) exchanges. As the residential real estate market has contracted and development slowed to a standstill, there is less property being sold for development to be exchanged for farmland elsewhere.

But then comes the ethanol demand, which has resulted in higher grain prices, which yields higher cash flows, which yields higher cash rents, which yields higher farmland values. That is undoubtedly the primary force at this time.

Looking ahead, I always lean on the cautious side. The bull market in the 1970s lasted primarily from 1973 to 1981 — eight years. This bull market really took off in an accelerated form in 2000 and here we are in 2007. Much of the positive cash flows from high-priced grain are currently discounted into farmland values. Investors and farmers in most areas have already bid land to where the return is little or no more than 3%. That has been, in the past, a historic leveling off point.

Consequently, I'm in the camp where farmland values are going to start to level off, or at least slow the rate of increase. Grain prices, to me, appear to have peaked. Revenue is still going to be strong because yields are high — but it's coming from yields and not price. The insanity of sharply increasing land values must slow or this market will make an exhaustion top and then result in a significant sell off.

Since debt is low, a sharp decline is pretty much out of the cards. A leveling off of prices for the next 12-18 months would be good for the market in the long term.

Other Factors

Historically, government programs have been a major factor in farmland values. That is of less concern today as prices are substantially above loan rates and cash markets are high enough that government subsidy payments are less of an issue. Drop the corn market 75¢/bu. (doubtful), and the government programs will again become a key factor.

What is a positive key factor, in addition to ethanol, is the advent of new investment funds. Pools of money are being arranged to purchase land from investors from all over the U.S. There is another pool currently being organized in Singapore to buy U.S. farmland.

There is an ample amount of cash available, and if the stock market continues a weak trend, even more cash might be available.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.