June 12, 2020

Factors Impacting Land Values

by Michael Langemeier

There are several key factors driving potential changes in farm land values.  These factors include cash rent, working capital, supply of land, interest rates, inflation, and investment potential of farmland compared to other investments such as the stock market, corporate bonds, or similar assets.  Let’s take a look at these factors in two groups.  The first group, cash rents and working capital, are creating downward pressure on land values.  The second group, supply of land, interest rates, inflation, and investment potential represent positive influences.

Cash rent is primarily driven by net returns to land.  Using a case farm in west central Indiana, net return to land has averaged approximately $237 per acre since 2007.  During this time period, cash rent in west central Indiana for average productivity soil has averaged $229 per acre.  Over the long-run, we would expect the average net return to land and cash rent to be similar.  Since 2014, these two items have not been similar.  From 2014 to 2019, net return to land and cash rent for the case farm averaged $185 and $256, respectively.  In response to this divergence in values, cash rent declined approximately 17 percent from 2014 to 2019.  Projected net return to land for 2020 is approximately $125 compared to a projected cash rent of $240 per acre, suggesting that further downward adjustments in cash rent may be needed.

Working capital is an important source of funds when making down payments on farm land.  Working capital per acre for most farms has declined substantially since its recent peak in 2014.  This decline in working capital has reduced farmers’ ability to purchase farm land.  However, there are farms that still have solid working capital positions.  Though working capital is used for other items such as to repay debt, and purchase machinery and buildings; farms with solid working capital ratios are in a good position to bid on farm land.

Now let’s turn to positive influences on farm land prices.  The farm land market is often considered to be a very thin market, meaning that at any particular time the supply of farm land on the market represents a very small percent of total farm land.  Anecdotal evidence indicates that this particularly true this year.  Farm land is also considered to be a good hedge against inflation.  Recent Federal Reserve policies in response to COVID-19 could potentially put upward pressure on inflation rates.  Because of its low correlation to stock market returns, farm land is also attractive to institutional investors.

Long-term interest rates or capitalization rates are a major factor impacting land values.  The capitalization rate depends on the long-term rate on U.S. treasuries (the risk-free interest rate), inflation, and the risk premium between the long-term interest rate for land and the long-term rate on U.S. treasuries.  If any of these factors increase (decrease), the interest rate on farm land is likely to increase (decrease).  Though inflation and the risk premium could increase, the long-term rate on U.S. treasuries remains at historical lows, subsequently providing support to farm land values.  It is important note that one of the primary reasons for the large increase in land values from 2006 to 2014 was declining interest rates.

In summary, even though net return to land for farm operators and working capital are relatively low, there are other factors helping support current land values.  In particular, historically low interest rates and limited supply of farm land may create a situation in which there is downward pressure on cash rents, but stable land values.

TAGS:

TEAM LINKS:

RELATED RESOURCES

Long-run Cash Rent

October 28, 2020

Examine breakeven prices, earnings per acre, breakeven cash rents, and trends in working capital with this spreadsheet tool.

READ MORE

Fall 2020 Crop Outlook Webinar

September 11, 2020

Recorded September 11, 2020 | Purdue agricultural economists Michael Langemeier and James Mintert discussed USDA’s September Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports.

READ MORE

Indiana Farmland Values & Cash Rental Rates: 2020 Update Webinar

August 7, 2020

Recorded August 7, 2020 | Purdue ag economists Todd Kuethe, James Mintert, and Michael Langemeier discuss the latest Purdue Land Values Survey and USDA’s Land Values report.

READ MORE

UPCOMING EVENTS

April Corn & Soybean Outlook Update

Join us Monday, April 12 at 3:30 p.m. EDT for an update on the corn and soybean outlook following release of USDA’s April Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports. Registration is free but necessary to receive the link to join live or get notice of the webinar recording.

Read More

February Corn & Soybean Outlook Update

February 10, 2021

Recorded February 10, 2021 | Purdue ag economists Michael Langemeier, Nathanael Thompson and James Mintert discuss USDA’s February Crop Production and World Agricultural Supply and Demand (WASDE) reports.

READ MORE

2021 Farm Bill Decisions for Crop Producers

January 21, 2021

Crop producers need to make their 2021 farm program choices at their local Farm Service Agency (FSA) office (or online) by March 15, 2021. Producers have the option of choosing either the Agriculture Risk Coverage (ARC) or the Price Loss Coverage (PLC) program.

READ MORE

Financial Management – Statements & Analysis

October 13, 2020

A series of financial management articles that examine financial statements and financial analysis. Financial management involves the evaluation of liquidity and solvency, financial planning, acquisition and use of financial resources, asset purchases and farm growth, and relationships with agricultural lenders.

READ MORE

Delivered right to your inbox

Don't miss our farm management program and resource updates! Receive our Commercial AGNews monthly newsletter - view the latest email here.