A Purdue University survey shows that Indiana farmland values have continued to increase despite last summer's severe drought, and farm managers and rural appraisers from across the state expect the trend to continue.
The results of the survey, conducted at a Feb. 5 meeting of the Indiana Chapter of Farm Managers and Rural Appraisers, closely follow a February issue of AgLetter in which the Federal Reserve Bank of Chicago said farmland values in Iowa and parts of Indiana, Michigan, Wisconsin and Illinois were up 16% since early 2012 — the third largest increase since the late 1970s.
While landowners welcome the news, Purdue Extension agricultural economist Craig Dobbins said it should signal caution for potential buyers.
"Buyers need to guard against current conditions making them overly optimistic about the market's future or tempting them to borrow too much money for the investment," he said.
According to Dobbins, the numbers indicate that the farmland market is very competitive, with many more potential buyers than sellers. Buyers are expressing optimism about future crop production profits and future farmland values by paying exceptionally high prices — something that could come back to hurt them financially.
"There are dangers associated with the continuing string of double-digit increases, and one of those is that buyers could be wrong in their expectations about the future of the market," he said.
Increased commodity production could lower commodity prices. Unfavorable weather in recent years has prevented this from happening, but a return to more normal weather could increase corn and soybean yields enough for commodity prices to fall quickly, tightening producers' profit margins.
Farmland buyers who borrow large amounts of money could find themselves in a financial bind, Dobbins said.
"Buyers who use borrowed funds are committing themselves to extra cash outflows over a number of years. Falling commodity prices could cause smaller cash inflow at a time the buyer needs more cash," he said.
Although survey respondents agreed that farmland value would increase in the short run, they disagreed about the five-year outlook. 53% of respondents thought farmland values would be higher in five years, 27% thought there would be no change, and 20% expected values to decrease.
The survey also measured farmland rental rates for 2013. The respondents indicated that the average, per-acre cash rent rate of farmland with average productivity is $278 this year. Most respondents said their cash rents were higher in 2013, six said their rates stayed the same, and none reported a decrease.
The climbing farmland rent rates have led some landlords and tenants to look at non-traditional lease agreements, Dobbins said. Respondents indicated that while 47% of their lease agreements were fixed cash, 36% of the leases were flexible agreements.
In a flexible lease, or variable cash agreement, the landlord and tenant agree on a minimum amount of rent and share a portion of the yield and price risk associated with crop farming.
Farmers, farmland owners, potential buyers and others with an interest in farmland can learn more about farmland values from Purdue Extension and industry experts at the March 27 Financial Health of Farming and Land Values Conference near West Lafayette. More information is available at http://www.agecon.purdue.edu/commercialag/progevents/financialhealth.html