Audio Transcript

James Mintert: Thanks for joining us for our podcast, Purdue Commercial AgCast. I’m Jim Mintert, Director of the Purdue Center for Commercial Agriculture, and we’re going to talk today about cash rental rates here in the state of Indiana. Joining us today are my colleagues, Dr. Todd Kuethe, he’s a professor in ag economics, and also holds the Schrader Endowed Chair in Farmland Economics here at Purdue. Michael Langemeier, who’s a professor in ag economics as well, and also the Associate Director of the Center for Commercial Agriculture.

[00:00:30] Indiana Cash Rental Rate Survey & 2024 Findings

James Mintert: So we’re going to talk mostly about the results from the Purdue Farmland Values and Cash Rental Rate Survey, which took place this summer. And Dr. Kuethe directs that. Let’s talk a little bit about the survey, Todd, how data is collected, and maybe how it compares to some other sources of information as well.

Todd Kuethe: Yeah, so we talked about this a little bit in the previous episode focusing on land values, but it’s also the same thing holds for the cash rental rates, right?

It’s a survey that the department has run since the late 1970s where we get the opinions from people that are involved in farmland markets as part of their regular jobs. So, appraisers, some farm managers and also some lenders that are involved in farmland transactions. And we ask them about what they’re observing in their, and the county they operate, and then we sort of report state level, and also in six districts.

We ask about cash rental rates, sort of what they’re seeing. We do a survey in June, so it reflects what’s going on in that summer that we’re observing. And so it’s again, the average for cash rent for their area and we split it into three levels of productivity. So top, average, and poor. That’s based on yields. They also report what’s the expected long run corn yield for that area and what they’re seeing for cash rental rates. Again cash rents that are paid by farms. So it’s like your typical lease of this is what they pay per acre and it’ll vary by on productivity.

James Mintert: So one way to maybe think about this is these are the rates that are perhaps best known or more, at least somewhat public with respect to people’s knowledge, and from an economist’s perspective, I might refer to those as the rates that are taking place on the margin. Does that sound appropriate?

Todd Kuethe: Yeah, I mean, I sure hope it’s at the margin from an economist’s perspective. And then the challenging thing with cash rental rates. It’s the hardest thing I think to measure in terms of agricultural finance. In part because farms that are operating at a commercial scale or supporting at least one household with their income, they tend to work with a number of landlords. So they’re renting from, you know, it’s not uncommon to hear of sort of a dozen rental negotiators that they’re involved in. And so each one of those will vary a little bit based not just on productivity, but also their negotiation, maybe their relationship. You know, they, we tend to negotiate rents typically every year, but those relationships last over a long time. So there’s a little bit of carry over what that relationship’s like. Do you trust the farmer or do you trust the landlord? And so it varies quite a bit.

So the USDA provides an annual survey of cash rents reported at the county level and they survey farmers. That’s part of the June Agricultural Survey which is mostly about production. But they also go about land values and cash rent as well. So they don’t differentiate at all based on quality. They also just ask all the farmers, well what do you pay? You know, on all the acres that you rent, um, what’s sort of the average.

And so, um, you know, when I used to work at the USDA, people would complain about, oh, these rents are not accurate. They’re way too low or everybody would rent at that level. Um, and then, you know, people will say, well, if you actually ask people that are involved as professional managers, farm managers, they tend to maybe have more negotiating power. And so their rents will be higher.

And so it’s one of the things that, like, it’s really hard to measure. Um, there’s also farmers have an incentive to keep that as a trade secret in terms of they don’t want to compete too much with other farmers. Um, so if you offer too low, someone else will bid against it, so they don’t necessarily want to tell everybody what they’re paying in rent. Um, but they also rent from multiple people, so they also maybe don’t want to rent too low, and then they find out, you know, I’m paying too much for others.

So the, the kind of joke I always make at extension events is if you get tired of listening to a farmer talk, ask them what they pay in cash rent and then they’ll be quiet. It’s a really hard thing to measure. And so we’re trying to get as best information we can as to what’s going on with cash rent in Indiana. Uh, but it’s a very tough, difficult to measure.

James Mintert: So with those caveats, let’s take a look at the results from this, uh, this year’s survey. And we’re looking at a chart here, Todd, that kind of gives us a little bit of history and perspective on these cash rental rates. The chart goes back to 2000, and then of course concludes with this summer’s results from the 2024 survey. So, you know, as you look at it, what were the changes that took place relative to last year and maybe relative to some of those historical periods?

Todd Kuethe: Yeah, so we have a slight decline in poor quality land. Uh, but it’s Again, just a very small change. Since about 2016, we’ve seen cash rental rates sort of slowly increase over time. And we still observe that for average and poor. Right, so we went from, for example, 2016, at the average is 204 per acre. Now we’re 260. Um, and then for the top went from 257 up to 313. So it’s sort of been just increasing gradually.

We had a couple of times where it sort of slipped a little bit and maybe some years it kind of went up, but this year it’s been relatively modest increase overall. But if you go back, you know, 25 years in the survey, it’s much higher than it was. Um, and part of it is we had this really high period, you know, mostly thinking about the RFS period, right, where we had very high commodity prices. We saw cash rents move up quite a bit for several years, then sort of hold flat. Then we had a little bit of a dip, and then over the last sort of 10 years or so, we’ve seen pretty consistent increase up.

James Mintert: And so for clarity, uh, Todd, you’re looking at the results from the state average, right? So these are all the observations you collected in the top, average, and poor categories. Keeping in mind that people were able to use top, average, and poor based on their local region, right?

Todd Kuethe: Yeah. Yeah. And, but, but, I mean, Ideally, it should follow what’s going on with production. It tends to equal out and sort of, if you think about it in terms of bushel of corn that you put out, then it should, that should be relatively consistent kind of across the state. That should hopefully be what’s sort of driving the difference, right?

James Mintert: And I know based on some previous discussions, you’ve talked about the fact that these are really the results that perhaps you have the most confidence in because you got the most number of observations.

Todd Kuethe: Yeah.

James Mintert: When we start talking a little later about the regional variations. Less confidence in those individual region results because there’s fewer observations behind each report.

Todd Kuethe: Yeah, and that’s part of it, right, is that the number of people that, um, that work in the, work in farmland markets as part of their regular job. I mean, that number is decreasing over the years, right? And so we have just fewer responses. So it does make it a little bit where, you know, it’s a little bit harder to measure in some locations than the others. Um, usually the more you increase the space, increase the number of people that respond, the more I feel like, okay, that, that average is pretty representative.

James Mintert: So just to reiterate, so your top quality average for this year for the state of Indiana was 313. Your average quality rate for the state was 260, and the low quality or poor quality land came in at a state average of 204, right?

Todd Kuethe: Yeah, and again, when we were talking about land values, for whatever reason, that sort of like 25 to 50 dollar threshold is what people really pay attention to. You know, so being sort of, you know, over 250, um, I feel sort of confident there. So what’s over 250, maybe 260 might be a little too precise, right? Or 313, it’s just a sign that we’re over 300. Um, people, I think, tend to sort of, a lot of the responses we get are sort of in those kind of 25 dollar threshold.

James Mintert: Yeah, good point. So if you look at the percentage changes on a year to year basis, I think it’s kind of interesting to think about it. First of all, thinking about what the yields are that people are thinking about on a state average in terms of how they categorize top quality, average quality, and poor quality. And then think about the percentage changes you’re showing in those cash rental rates from ’24 to ’23.

Todd Kuethe: Yes, uh, this maybe shows a little bit better that, you know, we’re seeing more of an increase in the top value. Um, relatively flat or stable kind of at the average and a little bit of a decline in the, in the poor. Um, but with each of those, what we’ve observed in the yield expectation, they’re all increasing over time. But again, kind of expecting a bigger gain for the higher yield and a lower, more modest gain in sort of the, the low yield.

James Mintert: Yeah, Michael, I just think it’s interesting to look at the yield numbers, right? If you look at top quality land in Indiana, survey respondents are suggesting that average yield is in the ballpark of 226 bushels per acre, uh, average 196, poor quality land 167. Um, I think you’ve made this point previously, those numbers keep going up, right?

Michael Langemeier: They sure do, and the average really is very close to the trend for the state. Uh, it might be, 196 might be a little higher, but it’s very similar to the trend for the state, and so I think that’s always interesting, uh, interesting to point out is, uh, you know, if you, if you’re looking, if you’re looking for trend yield and what the, what the cash rate would be for ground, for the average in Indiana, I think this average number here is very reflective of that.

James Mintert: Yeah, and in fact, if you look at the average, uh, uh, estimate from USDA’s most recent crop production report, uh, It’s actually a little over 200, right?

Michael Langemeier: Yeah, it is, but we’re over trend.

James Mintert: Right.

Todd Kuethe: And, and I think, you know, sort of going back to the idea of like, sort of what numbers do we, do I have the most faith in? I think we’re better to describe the average, um, for land markets and cash rents way more than we can. So I think there’s a sort of smaller amount that’s in the top or poor quality that the average is maybe not just like a middle third. It’s a, it’s a bigger set of the, uh,

James Mintert: yeah, I agree with that. Right. That’s, that’s good.

Michael Langemeier: I don’t know if this is just coincidence. I don’t always believe in coincidence and in economics, usually, usually there’s something behind it. But actually, if you looked at the, the ’24 crop budget, which would have been back in, back in March when we created this, there was, the break evens were, were really looked, looked high for the poor. And so it’s no surprise that that’s a downward adjustment. There was room for increase there. The average rate, you know, for average productivity, break evens were a little bit better, but there still were really high and it looked like you had losses. So only a small increase. For top, uh, that looked a little bit better. It, it still was not an economic profit, but, but it looked a little better and had lower break evens. And so there was a little, there was a little bit more room for, for cash rate increases. So I think it’s very logical, uh, given, given what we went through this year for net returns.

[00:10:49] Regional Variations

James Mintert: So Todd, let’s take a look at the regional results and the caveat here starting off is recognize that there’s going to be more variability based on the fact that you don’t get as many observations in some of these regions, right?

Todd Kuethe: Yeah, and I always, uh, sort of start with the idea that what we’re trying to do is summarize what people are saying is going on in the market, right? And this should just be kind of a starting point. When we think about what we’re going to talk about for rents in the next year. Um, but like the, again, that negotiation takes place between the landowner, uh, and the farmer.

I get calls from both sides, and no matter what we sort of report, half of those, uh, responses will be upset that it was either too high or too low. Uh, and so, again, we’re kind of seeing for most of the state modest changes. We’re seeing much higher increases in that southeast region. The largest declines in that southwest, but also, that’s also the area where we get sort of fewer responses. It’s not quite as much land that’s just dedicated to agriculture. Also, the more diverse in terms of like crop mix that’s possible, I think, than what we tend to see. And that, when I think about sort of, you know, Corn Belt economic dynamics, that West Central, Central region, I think, is the most representative in terms of what we see. And there relatively, uh, stable, right, in terms of, uh, not sort of large moves in cash rents from the previous year.

James Mintert: It, well, maybe with one caveat, I think in the central region, you’re picking up some significant increases, right?

Todd Kuethe: Yeah, I guess I should, uh, yeah, clarify, yeah, the central region a little bit more.

James Mintert: So, and I think if you look at the central region, you know, the average rate for average quality land was up about 10%, they put it at 275. Top quality land in the central part of the state was up 5 percent at, uh, what, 310. And the poor quality land, Michael, this was kind of interesting, we saw a fairly big adjustment on poor quality land in the central part of the state. It was up almost 13 percent at 238. But maybe that could be a reflective of differences in what people perceive to be poor quality in the central part of the state.

Michael Langemeier: Yeah, poor quality in central is not the same as poor quality in southeast, so we always gotta remember that. I think even though the percentage increases were higher in central this year than the west central, I think if you look at the numbers between the two, they’re very consistent.

I agree Todd, those are, those are the areas that are more, more, most like Illinois and Iowa if you’re looking at some information from those two states. And I think they’re very consistent with one another, in terms of the top is 310 in Central, 327 in West Central. Average is 275 in Central, uh, 278 in West Central. So, so maybe the, you know, looking at one year rents is always a little dangerous, but, but it seems like to me that they’re very consistent with one another this year.

[00:13:42] National Expectations

James Mintert: So, Michael, we’ve been asking people on the Ag Economy Barometer, what their expectations are for cash rental rates in the upcoming year. And we’ve asked the question two, two months in a row. We asked it in July, and we asked it again in August. So parallels pretty closely with when Todd was collecting data. And at least the first time out of the box, maybe we were a little bit surprised. You might look at those results for us.

Michael Langemeier: Yeah, I’m still a little surprised. Essentially 70 percent in August and 72 percent in July said that cash rents would be, would be about the same. Uh, you know, it’s hard to tell what they, what they interpret about the same. Is that a tight band around zero? So we don’t ask that, that specifically. At least we didn’t on this survey. And there was only, uh, about 15 percent both times that thought, uh, cash rent was going to be lower. And that’s what surprised me a little bit.

Uh, if you look at net returns and, prospects and ’25 they don’t look particularly good. And ’24 wasn’t it’s not very it doesn’t look particularly good either. And so I would have thought there had been a few more that were thinking about lowering cash rents. But we’re going to get into this here in a little bit here. And as we always say Uh, you can’t just look at one year of low returns and say, well, cash rents are going to go down that next year. It’s a little more complicated than that. You really need two or three years of low net returns to land before, uh, the market seems to say, yeah, it seems like we’re in different times now. Perhaps we need to do an adjustment of cash rent.

Uh, and we’re going to post these slides here. One of the slides I really want them to take a look at is a slide that looks at, uh, Uh, cash rental rate and compares that to estimated net returns to land. It’s for West Central Indiana average productivity, but this would be, this would be a very typical relationship for any, any part of Indiana, and probably Illinois and Iowa too. Uh, show a very similar relationship. And cash rent just does not adjust very fast. It’s very stable, uh, compared to net return to land. And so you’ll see net return to land, a hundred to 150 difference in one year. Cash rent just doesn’t adjust that fast, but having saying that 2021 we had a over a 500, uh, estimated net return to land. And so, uh, what that net return to land means is every cost except for land is out of there. That’s a pretty high economic profit. Uh, then we dropped about 350 and ’22, uh, in ’23, we dropped to 185 and ’24, my projection is around 70. And so, obviously we’ve, we’ve really, really, drop those net return to land over the last two or three years. And so I think we’re setting ourselves up for some downward pressure in cash rent in ’25.

James Mintert: Yeah, so when I look at the chart and listen to you talk about that, Michael, I really think about the fact that what cash rents do is they really smooth out the changes and the returns to land that take place on a year to year basis. Returns to land on a year to year basis can be extremely variable. Cash rents don’t vary nearly as much, but they do respond over time to changes in net returns to land. And I think that was kind of your point with not only this chart, but all some of the other research that you’ve done over the years. We do see a response in those cash rental rates. But it’s not immediate, uh, and so from that context, maybe the results we got from our Ag Economy Barometer Survey make some sense, even though ’24 is a pretty weak year, maybe we won’t see much response in ’25, the response could actually show up more along the lines of ’26, and if you look at history, looking at your chart, that’s exactly what happened back in that, uh, what, 2014 2015 era. Uh, we didn’t see, we had some relatively weak returns in 2014 – 2015. We didn’t see much change in cash run rates until 2016.

Michael Langemeier: Yeah, the chart looks very similar. If you look at 2011 to 2014, And ’21 to ’24 looks very, very similar. And you’re right. It took a year or two, a year or two longer than you might expect, uh, to see the reduction, uh, reduction in, in cash rents. And this makes sense because, you know, cash rents are negotiated and, and, and before someone’s going to define a new normal, it takes a while to convince people that we’re in a new normal.

Todd Kuethe: I also think it takes a while to, for the opportunity cost, right, where you’re willing to walk away from land.

Michael Langemeier: Yes.

Todd Kuethe: Right, to say, like, you know, I just can’t afford doing this, right? Um, where you’re saying, well, you know, as much as we maybe think ’25 might be a down year, it’ll be another year to put, there is a group that’s sort of hopeful, like, well, maybe ’25 is when it’s going to turn around, and I’ll be glad to have had it. It’s not quite a strong enough signal to really, to, to change my behavior.

James Mintert: Yeah, good point.

So Michael, you’ve taken a look at something else that kind of helps us put the relationship between cash rents and farmland values in kind of a long term perspective. So, let’s start off by defining a couple of terms here before we start talking about the results.

Michael Langemeier: Yeah, what I’m trying to compare, compare next here is the, the farmland price divided by, uh, the 10 year historical cash rent. So we take farmland price, then we take the previous 10 years of cash rent. That’s one number. And then I do the same thing for net returns. Uh, farmland price divided by the previous 10 years in net returns.

Why 10 years? Well, I’m trying to look at a longer time period. And you’d expect in a longer time period in economics that these two numbers would be very similar. That cash, that, that 10 year average cash rent would be similar to 10 year average net return. If there’s a lot of difference between those two, then you think, well maybe we need some adjustment here, either, uh, probably to cash rents because we can’t do much about net return to land, as far as adjustment. Maybe we need some adjustment, uh, to, to cash rents.

And, and what I’m seeing right now here is, is, convinces me that chart we that we talked about previously, where we’re seeing some downward pressure on cash rent is very real, because if you look at the look at these two numbers, P rent 10 and P net return 10, you’re looking at a rent 10 of 300. And a 10 year average historical net return average of 273. That means that right now the, the 10 year average rent is $25 approximately over, over the long run net returns. That again, uh, tells me that we’re probably looking at some downward pressure to cash rents. Cash rents are a little higher than the historical net, net returns.

And it’s very consistent. I run a regression. I run a statistical analysis where I look at current cash rent in relationship to lagged cash rent and net return to land and that regression is also telling me that there’s some downward pressure in ’25, and particularly in ’26.

And so, all of this is consistent. I might be consistently wrong, guys. But all of this is consistent, saying that there’s some downward pressure on cash rent. Now whether that’ll occur right away in ’25, we’ve already talked about that. It might not. If I do a bet, I’ll just stick my neck out here. If I had a best guess for what the ’25 might look like, I’d say 0 to down 5%.

James Mintert: So, Michael,

Michael Langemeier: So a small adjustment.

James Mintert: Another way to think about this is, we really don’t see any reason for any upward pressure on cash runner rates in ’25. If there’s any pressure at all, it’s going to be the downside, but what we’re saying is that based on history, we think that downside pressure will be less than you might think, given the collapse that’s taken place in net returns to land.

Todd Kuethe: Well, I think it’s sort of consistent with what the respondents for the barometer and as me looking at this as an economist to say, you know, there’s been about five years now where that P rent 10 is below, but there was also about a 15 year period there from the late eighties till about 2008 where it was also below.

Michael Langemeier: Yeah.

Todd Kuethe: So like, it’s not like it’s going to be a one to one immediate adjustment. So even if there is downward pressure, we may not really realize it.

Michael Langemeier: That doesn’t mean the adjustment is ’25. That means the adjustment is long term.

Todd Kuethe: Yeah.

Michael Langemeier: Yeah.

Todd Kuethe: So we’ve observed that sort of gap for long stretches of time in the past. Um, and so. It’s not that we’re going to necessarily see the market immediately respond.

James Mintert: So, Michael, you also took a look at the same relationship except looking at the stock market, and that’s kind of interesting to contrast what’s taking place in the stock market when you look at the price earnings ratio when the earnings are averaged over 10 years, relative to what’s going on in farmland. Actually explain some things in terms of why people are interested in investing in farmland.

Michael Langemeier: There’s two things that I find very interesting, what Shiller calls the Uh, the cyclical P/E ratio or P/ E 10 is another name for it. So, so stock price divided by previous 10 year earnings. And so I’m, I’m, I’m just mimicking Shiller, uh, for, for cash rent and, and net returns here.

But there’s two things that I, I find very interesting. First, the P 10 is quite volatile. The stock market is quite volatile compared to the farmland market, so that’s no big surprise. But the other thing is there’s, there’s not a close relationship between, uh, the stock market and farmland market and we, we know this, but it’s, I think it’s always important to reiterate that.

And so if the, the economy goes into recession here in the near term that does not necessarily mean ag is going into recession and vice versa. And so we always gotta keep that in mind. When we’re looking at the stock market. There’s not a close relationship between the stock market and the farmland market, uh, and as we’ve, as, as research has shown, essentially the correlation between, uh, you know, farmland prices and the stock market is, is very close to zero.

Todd Kuethe: Yeah. In fact, you know, if there is any sort of movement at all, it occasionally sort of shows negative correlation, right? So, one of the reasons farmland is great to own is that, uh, it adds a lot if you have a diverse portfolio of a bunch of things that you own, right?

James Mintert: Yeah, and explains why nonfarm investors in particular have some interest in owning farmland because it does diversify their portfolio away from stock market returns and actually kind of smooths those returns for their total portfolio, right?

Todd Kuethe: Yeah, particularly if you look at sort of, you know, things like you know pension funds or you know the life insurance companies that want to have a broad long run holding that’s it’s a it’s great for it.

James Mintert: So Michael you’ve taken a look at the farmland price to cash rent multiple for West Central, Indiana And that’s an interesting chart related to what we’ve just been talking about, but it may be and for some respects might be a little easier to understand.

Michael Langemeier: Yeah. Lemme talk about this in a couple different, different ways. I’ll start with the, with the capitalization rate, which is cash rent divided by farmland prices. And then I’ll, I’ll flip that around, uh, to do the p rent ratio, the, the inverse of each other. If you look at the long run average capitalization rate, and this is going back to 1960, it’s 4.5%. There were some times during that, well it was over 5, but the long run average is 4. 5%, and recently it’s been quite low, recently it’s been 2. 5%.

If you do the inverse of that, what you find is the long run price to cash rent multiple, so farmland price divided by current cash rent is, right now, we’re sitting at approximately 40. And so obviously the, the P, the P, uh, rent ratio is relatively high, but that’s because the capitalization rate is relatively low. And we probably don’t want to get too far into the weeds here and why the capitalization rate is relatively low because that’s a very complicated number to talk about. But one of the reasons, obviously, is since 2008 until recently interest rates were very low and, and that really created a situation where the cap rate was pretty low for, not only for land, but for other assets too. Uh, it also created a situation where the, the P rent and the PE ratio were relatively high, and so really if you’re thinking about where this is going in the future, it really depends on where you think interest rates are going in the future.

And, you know, even though we had a, had a relatively large. Uh, increase in Fed funds rate and other interest rates recently, the Fed has signaled that they want to take one to two percent, I think two percent in the next two years, off of those, off of those increases that we saw in the last year. And so that would lead me to believe that if, to the extent that there is upward pressure on long run capitalization rate, downward pressure on the P rent ratio, it’s not real strong pressure. And so I think that cap rate of two and a half percent is probably going to be, stay that way for a while. At least that’s my read.

James Mintert: Yeah, so the chart is interesting when you look at it, and for listeners, if you haven’t had a chance to do so, I’d encourage you to download the slide deck that accompanies this podcast.

The chart, at first glance, suggests, to the casual observer

Michael Langemeier: that we’re paying too much for land.

James Mintert: I’ll include myself in that category. It suggests we might be at a peak and your argument is that could be true, but you think reductions in interest rates over the next year or two could actually be supportive of that. In fact, a big chunk of that run up in that P. E. Ratio is attributable to the fact that interest rates in recent years have been so low. Right?

Michael Langemeier: Now, one of the things that we did see if you go from 2007 to 2014 in particular, both cash rent and farmland prices increased dramatically, but farmland price increased much, much faster than cash rent, and that was because of those low interest rates.

And so, we are in an environment now, if the, if the, if the capitalization rate is going to be relatively steady, then cash rent and land value is going to move more similar in terms of percentages. I think we’re out of that period, uh, at least from an interest rate standpoint, where there’s, where there’s more upward pressure on, on, on farmland than there was cash rent. But we went through a very long period where that was definitely the case.

Todd Kuethe: I think there’s a couple, I also think about the long holding period that we tend to have for farmland ownership, right? Because in some ways this number is also a way of thinking about how much would you pay.

Michael Langemeier: Yeah.

Todd Kuethe: To have this access to farmland, uh, returns, right, uh, rental rates, right? So if I was gonna buy it and rent it out, that if I was gonna own it for 40 years, I’d feel pretty fine about it, right? Um, is sort of one way that I think about it. But then I also kind of think about it in terms of, um, you know, how there’s also the part which is like the appreciation of the asset, like that sort of capital gain that you could get, right, and how much that’s maybe a driving influence, right? So there are times where, you know, the cash rent is great because, you know, it gives you some positive return even if the market price is going to go down. If you don’t realize it, you’ll still get that gain. Right. Um, but like it sort of fits into this idea of kind of this cap rate in general suppression, I think across the broader economy, it’s not sort of unique to the agricultural sector. But what is unique about ag is that long holding period. And so you have, you know, sort of, you know, historically, you’ve kind of modest returns from owning farmland. But like, it’s a really great retirement source to own because the capital gains. We’ll be high over that sort of 20 to 30 years.

Michael Langemeier: That’s been particularly true as we were talking before the podcast, since 2007, and maybe a little bit before that even, that’s been particularly true during this most recent 15 to 20 years is the cap rate as a percentage has been much higher than, than the, than the, than the capitalization rate. And so holding land has been, has been a good idea.

James Mintert: So I think two points that we were discussing before the podcast. Todd, you mentioned the fact that, um, the low cap rate influenced asset values across the board, right?

Todd Kuethe: Yeah.

James Mintert: That was positive for asset values.

And then the related point was, and Michael, you were talking about this looking at some of the USDA data. With respect to how much of the gain of owning farmland over a long period of time is attributable to the increase in asset value versus the income generated or stated another way thinking about the income generated as being like a dividend. How much is coming out of the dividend. How much is coming out of capital appreciation you looked at those numbers.

Michael Langemeier: Yeah, it’s a rate of return that USDA ERS computes for the farm sector. They have a farm sector balance sheet. And of course they do the income statement, the net farm income forecast. Uh, also, but this is another thing they do, is they calculate a rate of return, and they break, break that rate of return into current income, which I, you know, is analogous to cash rent. Uh, you know, even if, as an opportunity cost, even if you own the land. But the current income, and then capital gain, most of the capital gain, if not, now over 90 percent would be attributed to farmland. And what they found here, uh, looking at the last, again, since 2007, that’s what I always, I always look at the start of the ethanol boom, two thirds of the rate of returns come from capital gains on land. Two thirds! And so, and so it just stresses the importance to farmers to having farmland on the balance sheet.

James Mintert: Yeah, good point.

[00:30:48] Conclusion

James Mintert: So, with that, I think we’re going to kind of wrap it up for today’s podcast, Michael. So thanks for joining us, Todd and Michael, both.

You can get a little more details with respect to the land values and cash rental rate survey information on our website, which is purdue.edu/commercialag. And if you’re not already a subscriber to the podcast, if you’re listening to this on the website, you can subscribe. Uh, any of your favorite podcast providers would have the podcast available. When you search for it, just remember to search for Purdue Commercial AgCast and it should pop up very quickly.

Uh, so with that, I want to thank both Todd and Michael, for joining us. And on behalf of the Center for Commercial Agriculture, I’m Jim Mintert. Thanks.