The farm press and coffee shops have been a buzz this winter with discussions of farmland values in Indiana and other Midwestern states. In February 2016, the Chicago Federal Reserve Bank indicated that farmland values in Indiana were down 2% between October 1, 2015 and January 1, 2016.

Values in Illinois and Iowa declined 1% and 3%, respectively. Values in Michigan and Wisconsin increased 1% and 2%, respectively. In the face of significant farm income declines, farmland markets remain uncertain about how to respond.

To obtain a perspective about recent changes in Indiana’s farmland market, members of the Indiana Chapter of Farm Managers & Rural Appraisers were surveyed during their winter meeting on February 3, 2016. To obtain information about Indiana’s Farmland market, members were presented with the following situation:

80 acres or more, all tillable, no buildings, capable of averaging 170 bushels of corn per acre and 50 bushels of soybeans in a corn/bean rotation under typical management and not having special non-farm uses.

Farmland Values

Responses from people representing 27 different counties were received. The average estimated price of farmland was $7,968 per acre. Five respondents indicated no change in farmland values when compared to values in February 2015. The remaining 22 respondents indicated their estimated price was lower than the value in February 2015. The average percentage decline was 9% with a range in estimated decline from 2.5% to 15%.

Not too long ago many people were asking how high farmland values might go. It would appear that the 2013/2014 values were the top. The group was asked to provide forecasts of future farmland values in one year and in five years. In one year, 15% of the respondents indicated that values would be the same. The other 85% said they would be lower by an average of 8%. The declines ranged from 3% to 15%. These respondents have a strong consensus that in the short run farmland values will not increase.

There was less agreement about the change in farmland values over the next five years. In this case, 19% of the respondents indicated farmland values would be higher, 33% indicated farmland values would be the same as current values, and 48% indicated farmland values would be lower. Those indicating that farmland values would be higher averaged 14% with range from 5% to 20%. Those expecting a decrease averaged 13% with a range from 5% to 30%.

Cash Rents

Attendees were also asked to specify the cash rent for 2016. The average cash rent for the example parcel was estimated to be $234 per acre. The estimated cash rents varied from $175 to $300 per acre, a difference of $125 per acre. Three of the respondents indicated cash rent remained the same as in 2015. Everyone else indicated that cash rent declined. The average reduction was $20 per acre. This was a reduction of about 8%.

As with farmland values the respondents were asked to forecast cash rents one year and five years into the future. When asked what cash rent would be in 2017, 22% of the respondents indicated they would be the same as 2016. The remaining 78% indicated cash rents would be lower. The average decline in cash rents was 8.5%, just a little more than the reduction from 2015 to 2016. The range of the declines varied from a reduction of 3% to 15%.

As with farmland values the five year projection was more uncertain with 15% of the respondents indicating cash rents would exceed the 2016 level. This group expected cash rents to average 15% higher than the 2016 value. Forty-eight percent of the respondents expect cash rents to be lower by an average of 13%. The range of decline varied from 5% to 20%. The final 25% of the respondents expect cash rents to be the same as they are in 2016.

These results indicate a pessimistic attitude in the rental market. This is not surprising since there has been little reduction in cash rents since they reached their peak. At this time, it appears that many respondents anticipate cash rent declines for the next several years.

Final Thoughts

The effects of much tighter margins are rippling through the farmland and cash rent markets. This small survey indicates the adjustment process may stretch over the next several years. The majority of the professional farm managers forecast that farmland values would have a gradual decline. Using the 9% decline respondents indicated for February 1, 2015, to February 1, 2016, and the anticipated 8% reduction from 2016 to 2017, the two-year decline is about 17%. So, is this a gradual decline? How will farmland value declines of 17% to 20% change landowners’ balance sheets and the conversations with their lenders?

Cash rents are also adjusting downward. Respondents indicate from February 1, 2015 to February 1, 2016 cash rent declined 8%. There were two groups when asking respondents about changes in 2017. One group indicated no further decline. The other group expected further declines with an average decline of 8.5%. Over this two-year period, this leaves a decline of 8% to 16.5%. Will there be further declines? In the spring of 2016, these reductions do not appear to be large enough for many tenants to regain profitability on rented farmland. In addition, many tenant budgets will suggest further erosion of their working capital with current costs and new-crop grain prices. This suggests further reductions in cash rents unless grain prospects improve or some costs drop more.​