Have you ever wondered what would happen (to land values) if government policy eliminated commodity programs?” asks Art Barnaby, Kansas State University (KSU) ag economist.

Barnaby quickly adds that he doesn't expect that to happen in the near future. But if it should happen, his KSU colleagues Terry Kastens and Kevin Dhuyvetter have a good idea of how it would affect the recent record run-up in farm real estate prices.

The two economists completed a study in October 2004 on how government payments and non-agricultural returns impact land values in 39 farming states. Without government payments, land values would drop by greater percentages in Great Plains and Midsouth states — by 30.7% in Nebraska, for example. The results of that study can be found at www.agmanager.info.

The other main spur to land prices is the attractiveness of land as an investment. That may seem strange, given that landowners historically have tried to rent farmland for only 5% of its value, plus property taxes.

“But there aren't many high-yielding investments right now,” says Randy Hertz, of Hertz Real Estate Services, a realtor and professional farm management firm at Nevada, IA. “There's lots of interest in good land and there isn't much of that available at a good price. Actually, there is land available to a buyer who is willing to pay $4,000 or more per acre.

“Farmers are still buying two-thirds of the land being sold, but land makes sense from an investor's point of view,” Hertz adds. “He can earn 4-6% yield in the form of cash rent, plus the appreciation in value of his asset. Rental competition is strong in most areas — $150-200/acre cash rents are not uncommon.”

People who sell land to developers near a metropolitan region, then do a “tax-free swap” for land farther out add much of the fuel for a hot land market.

Current tax provisions allow an owner to sell land, put the money in escrow and then buy other “like kind” land with no tax liability.

“That's happening in this area,” says Gail Witt, who farms with his brother Duane near Missouri Valley, IA. “Omaha has really been booming. Farmers near there have sold out and bought land in this region. The result is land prices that range from $3,000 to nearly $4,000/acre.”

Rents reflect the inflation in land prices, too, Witt adds. “A lot of land here is cash rented; most of it in the $160-170/acre range, with some better land renting up to $200/acre, and there's no shortage of potential renters,” he says.

Floyd and Dwight Bohlen see much the same in their region of eastern Illinois, near Fithian.

“There's not a lot of land moving, although prices on good cropland have gone to $4,000-4,500/acre,” says Floyd. “But there's a big demand for rental property, at $180-200/acre on top-quality ground. Some of us don't think we could afford that kind of rent, but farm operators are scrambling for more land to rent.”

Even at higher cash rents, $200/acre for $4,500 land is a return of only 4.4%.

“As a result, a lot of lenders who own or manage land are going to custom farming, rather than rent land they control,” says Bohlen.

Floyd Bohlen can remember the farm real estate crash of the late 1970s and early 1980s, which was preceded by a rapid escalation of land prices. Financial conditions were vastly different back then. Both inflation and interest rates were galloping along in double digits. But the prospect of a major market correction within the next few years has some economists concerned.

“Low interest rates and a less-than-stellar stock market the past few years — coupled with record crops — have made farmland an attractive investment,” says Ron Plain, University of Missouri ag economist, noting that Missouri's farmland increased 7.6% in the past year. “However, as the economy strengthens and interest rates rise, I'd expect land value growth to slow. While I don't see land values falling off a cliff like they did during the crisis of the early '80s, if you're in the market to sell land you may want to start looking for a buyer.

“We've been expecting a stronger general economy for some time now,” Plain adds. “With it will come higher interest rates and downward pressure on land prices.”

Hertz is more optimistic about the long-term health of the farm real estate market. And he observes a growing residential and recreational demand for rural land.

“There's a lot of capital to finance land purchases,” Hertz says. “Well over half of farms sold today are bought with cash, with no indebtedness. If you can tell me how long we'll have 200-bu.-plus corn crops, I can tell you how long land prices will continue to be strong.

“If you look at the demographics and our present rates of birth and immigration, we'll have 458 million people in the U.S. by 2050,” he adds. “Those people will need a place to live.”

They'll also need to eat, which keeps a sizeable prop under prices for food-producing acres.