Farmland Values Face Third Year of Decline

Average Indiana farmland values reached a peak of $8,129 per acres late in 2013. The 2016 Purdue farmland value survey indicated average farmland values had declined to $7,041 per acre in mid-2017; a decline of 13.4%. The primary force behind the farmland value decline has been the decline in crop production profitability. In 2013, the Purdue Crop Guide indicated a contribution margin of $483 for corn and $431 for soybeans or $457 for a corn soybean rotation. The contribution margin represents the amount of revenue remaining to pay the overhead or fixed costs of unpaid owner labor, machinery and facilities and farmland. 

As Indiana farmers move into 2017, grain prices remain at low levels. While there have been some downward adjustments in the cost of inputs, input prices have been slow to reflect the lower product price environment. With the abundant corn harvest of 2016, without some type of supply disruption in 2017, there seems to be little reason to expect significantly higher 2017 corn price. 

Given the strong export demand for soybeans, the soybean price has not experienced the same price decline that has occurred in corn. The 2017 Purdue Crop Guide indicates the contribution margin for corn is projected to be $211 per acre while the contribution margin is $261 per acre, or $236 per acre. Over the four years from 2013-2016, the contribution margin has declined 50%. If this lower contribution margin is allocated to unpaid labor, machinery and facilities, and land in the same proportions as 2013, these payments would be 50% less. Capital asset pricing theory indicates that if the amount of long-term income generated by a capital asset is reduced by 50% then the assets price will decline by 50%, if other factors stay the same. 

While the margin from crop production is strongly negative, there are several other factors that influence farmland values. Most of these factors are positive. First, long run interest rates continue to be at historically low levels. Increases in interest rates have been expected for a number of years, but they have not occurred, at least not yet. The supply of land being brought to market continues to be in balance with the demand. Both sales and purchases have declined. 

One of the important dynamics of the farmland market in the 1980s was the excess supply of farmland on the market. Farmland is still viewed as a good investment for those looking to diversify their portfolios. Inflation expectations also remain low. Low expectations about future inflation contributes to low long-term interest rates. Finally, there are still buyers in a strong cash position, but fewer are likely to be farmers. On the negative side, the current farm policy is not as supportive of farmland values as prior policies. There are currently no expected policy support payments associated with the 2017 crops for corn or soybeans. Prior policies would likely be providing significant support payments in this price environment rather than none. 

Current low grain prices continue to set a negative tone for farmland values. While there are several positive forces in the farmland market, these positive factors are overridden by low farm commodity prices and narrow contribution margins. Producers continue to look for ways to lower the per bushel direct and fixed costs of producing corn and soybeans. Futures prices indicate a rise in the price of corn for 2018 and 2019, but a decline in the price of soybeans. With the continued tight margin situation, farmland value declines are expected to continue. For 2017, it seems likely that farmland values may decline another 5% to 10%.