Land values are driven primarily by cash - who has it, how much they have and what they're willing to spend it on.

From the first of November to the end of January I gave 22 speeches to farm organizations and related groups. One of the most frequently asked questions was: "Why are land prices and cash rents going up so much?"

Before we talk about what is important, let's first address some of the myths and false assumptions about what determines land values.

- The price of corn and soybeans. Many people say land values can't go up because corn prices are cheap. In reality, corn and soybean prices have little, if anything, to do with the value of farmland. Gross income and net income per acre are more important.

- The stock market and general economy. If you look at history there is almost no correlation between a bull or bear stock market and what happens to land values. Some say that a declining market is bullish land because investors pull their money out of the stock market and put it into farmland. That's not really the case. Investors don't switch back and forth between these two alternatives.

- The price of inputs. While obviously important to farmers' bottom-line profits, the prices of fertilizer, chemicals and even natural gas have a short-term impact on incomes. But long-term correlations to land values and rents are negligible.

Five factors are extremely important in cash rents and land values. They are:

1) Cash - who has it and how much they have. This is still a cash-driven society. What's important is who has the money, how much, and what they're willing to do with it. There are many assets whose values, just like farmland, have little or nothing to do with the amount of income they produce.

2) Government programs. The chart shows a big influx of cash has come from Uncle Sam the last two years. Net farm incomes may continue to rise this year. Payments in 2000 exceeded $23 billion compared to $7.5 billion in 1997. After farmers received LDP payments this past fall, they bid much of that cash into rents. If it weren't for the size of LDP payments to Midwestern farmers during October and November, cash rent increases would have undoubtedly been smaller.

3) Non-agricultural alternatives. Five or more years down the road, alternative uses for land will have a significant impact on values, especially if you're close to a town of significant size. As the economy continues to soften, however, this may become much less of a factor.

4) Local factors. Each community has its own factors that affect cash rents and land values. For example, if a farm is being auctioned, the value will depend on who shows up at the auction and how many big egos are involved. Nothing is more bullish for land values or cash rents than three or more farmers all wanting the same piece of property, and all of them having a lot of cash and large egos.

5) Farm sizes are increasing. This may make little sense. But the fact that farms have increased in size in the last three years is a bullish factor for continuing increases in land values and farm sizes. Why? As long as their balance sheets are still solid, large farms have more leverage and buying power than competing small farms. This increases the competition for land.

Parting thoughts: It's hard to make sense of why land values are so high. But as long as the government continues to pump cash into the farm economy and the consolidation trend continues, land values and cash rents will edge higher.

Remember that for any asset value to drop sharply, you must have forced liquidation sales. And for that to occur, you must be in an environment of extremely high debt. That doesn't exist in agriculture today and thus the downside risk is far outweighed by the upside potential.