One only has to look at the stock market to recognize that asset values aren't always based on earnings or even potential earnings. We live in a cash-based society where asset values are determined in large part by how much cash is available, who has it and what they want to do with it.

While we always like to look back and make comparisons to past years, today's land market value and trends have only a few similarities to those of the late 1970s and early 1980s. The bull market of the 1970s was fueled first by sharply rising commodity prices and then, in the later phases, by aggressive buying through sharp increases in borrowing.

As the accompanying chart shows, from 1973 through the early 1980s, farmers' utilization of debt repayment capacity went from under 40% to over 100%.

Today is different.

Farm debt was building from the mid-1980s through the end of 1998, then appeared to stabilize in 1999. Recent USDA statistics show that, from 1993 until the end of 1998, farm debt rose by almost $34 billion or 24%. Almost half of that gain, about $16 billion, occurred in 1997 and 1998. That brought total farm debt at the end of 1998 to $172.9 billion, and in 1999 the debt was almost identical at $172.8 billion.

But even in light of the modest debt increases over the past few years, balance sheets have improved significantly overall in agriculture. Total equity in the U.S. farm business sector in 1999 was pegged at $894.4 billion. In 1996, at the peak of the bull market, equity totaled $847.8 billion.

The bottom line: The overall financial health of agriculture is in better shape today than at any other time in history. The debt-to-asset ratio is currently pegged at 16.1% after peaking at 23% in 1985. The current environment of low debt combined with relatively low interest rates makes it nearly impossible for forced liquidation sales to occur. That means the downside risk of ownership is minimal. And if anything positive occurs, the upside potential will likely exceed current expectations.

Parting Thoughts

I'm not indicating nor inferring that farmland prices are about ready to explode to the upside. All I'm saying is that the correction to the downside in the last two years is most likely over. The downside risk at this stage is minimal. What most likely will happen is a period of stabilization that could last two or three years. But should commodity prices move higher in any significant manner over the next two or three years, the bidding wars will increase quickly and the transition to larger farms will accelerate.