Farmland Prices – Staying Strong

This fall’s down move in corn prices from $7.50 to $6 has done little to slow the rapid increase in farmland values. Sales of good land in Illinois and Iowa in the $15,000/acre neighborhood have become fairly common. Even land that would be classified as marginal farmland is bringing $7,500 an acre and more.

There are, however, significant regional differences in land values and therefore cash rents. Most areas of Indiana, for example, have not kept pace with Illinois on either land prices or cash rents. The extreme increases seem to be more in Iowa and Illinois where there are many more buyers than sellers.

Does It Make Sense?

If you put together a budget assuming $5.50 for corn and $10 for soybeans, paying $15,000 an acre for land does not generate a reasonable return. But at this stage that doesn’t really matter, which means the horse is not pulling the wagon. But this is not the market of the 1980s when farmland prices boomed and then collapsed. The odds of a bust are slim this time around – although we could see some minor softening. Why?

1. The majority of land is currently being purchased by farmers with cash or if it’s bought by an outside investor it’s usually being bought with cash. Very little leverage is taking place.
2. With the average size of farms much larger now than in the 1980s and the average net worth substantially higher, most farmers who are purchasing this land are more focused on their average land cost rather than the purchase itself. If a producer already owns 3,000 acres free-and-clear and buys a 160-acre parcel for $15,000/acre, what difference does it make how much he pays for the additional 160 acres? It’s a small investment compared to his base.
3. Lenders have become much more conservative and have forced tighter controls on leveraging farmland. Most, but not necessarily all, will lend no more than 60% of the purchase price of a farm. This will help keep many farmers out of trouble.

The Bottom Line

Purchasing farmland is a personal decision based on your net worth and what you want to do with your money. Near-term economics have little to do with the sharp rise in land values.

This investment has proven to be a very solid one over the past 50 years and while there could be some minor softening, land investments will continue to be a good way to build wealth.

To expect a continued rise in land value similar to the past three years, however, might be a little optimistic. And if you want to be conservative in estimating cash flows on Corn Belt farmland, assume $5 corn and $10 soybeans. That will be more realistic.