Audio Transcript:

 

Michael Langemeier: Welcome to Purdue Commercial Ag Cast, Purdue University Center for Commercial Agriculture’s Podcast, featuring farm management news and information. I’m your host, Michael Langemeier, Director of Purdue Center for Commercial Agriculture, and joining me today is Todd Kuethe, Professor and Schrader Endowed Chair in Farmland Economics.

Today’s podcast is gonna focus on farmland values, primarily coming from the 2025 Purdue farmland and cash rent survey. We’re also gonna stick our neck out here a little bit and talk about factors that are important. Looking at land values, uh, you know, that are coming up in in the next year or so. And so, so we’ll also talk a little bit about, fundamental factors impacting land values for ’26, and then talk a little bit about some projections, for the rest of ’25 and maybe talk a little bit about, where things might be heading in ’26. And so that’s what we want to do in today’s podcast.

[00:00:53] U.S. Farmland Values
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Michael Langemeier: And, we wanna start with looking at some U.S. farmland values. And so back up here a little bit, we’ll start with some U.S. farmland values, and then we’ll get into what’s going on in Indiana. And Todd, really the trend is similar. You know, the numbers are obviously different, but the trend is similar. We’re gonna start by talking about the strength of the farm sector balance sheet.

Todd Kuethe: Yeah. So I, this is where I kind of always start when I talk to groups about farmland, right? Which is in part to justify why I spend so much time studying farmland and that it’s such an important part of the U.S. farm economy. According to the USDA balance sheet, the forecast of as of February, I know they’ve got a new one coming out soon, over $4 trillion of assets in the ag sector. 3.6 trillion of that is in real estate, right? So, we’re looking at real estate making up. About 83% of the asset base, which has been increasing over the last, 15 to 25 years. But it, usually hangs around that 75 to 80. What that basically means is the simplest terms, is for every dollar of stuff that farms own to produce their commodities, 83 cents of every dollar is dedicated to land.

And then land has also been inching up in terms of the share of total real or total debt. So if we look at total farm sector debt, we’re now right at about two thirds of debt is used, being used to purchase and invested land.

And so farmers, even though we’ve had very high prices over the last, 10 to 15 years, people would, a lot of people would argue, farmers have been reinvesting. And sort of, acquiring mortgages and purchasing land. And that’s a big part of what keeps our debt to asset ratio relatively low and stable as a sector of the economy.

I had a graduate student that years ago looked at debt to asset ratios across different sector of the economy and the agricultural sector kind of hung right in the middle. If you look at large corporations, they’re. Running much higher debt levels. And then there’s some very low debt and we kind of hang in that middle.

Michael Langemeier: Yeah. One of the things that’s so important about looking at the balance sheet for a farm, and lenders do this all the time, they obviously require a balance sheet of their customers in addition to, many times a cash flow, projections or some historical, net form income information is when you look at financial stress. It’s both low net returns and the strength of the balance sheet. And one of the things that’s really. Helping reduce financial stress in these times of low net crop returns is the fact that the balance sheet remains relatively strong. Like you indicate, the debt to asset for the U.S. farm sector is only about 13%.

But even on the larger farms, if you look at the FINBIN data outta University of Minnesota, the debt to asset ratio is still only 30%. That would be quite a bit lower than a lot of, corporations and other industries.

Todd Kuethe: And, and a lot, and a lot lower than a lot of smaller businesses, right?

Michael Langemeier: Yes.

Todd Kuethe: Like they’re sort of equal size in terms of, uh, economic activity or employees. The farm sector is very stable that way.

Michael Langemeier: Let’s talk a little bit about the trend in, in land values, going back to all the way to 1950. So it’s, it’s, it certainly looks like it’s been an upward trend.

Todd Kuethe: Yeah. I put 1950 back, in here and I always toy with how far back to go. In fact, the U.S. federal government has collected farmland price information since before the USDA was created. Right. ‘Cause agriculture is such a big part of the economy back then. But I cut off the 1950 here in part to show, the one thing I always feel like I have to show is the eighties.

Michael Langemeier: Yeah.

Todd Kuethe: Uh, part of it, I was born in 1981 and so I’ve had a lot of audiences continually to this day. People will say like, well, you weren’t around in the eighties. You don’t really understand what it was like. Right. Where we had that period of increasing our international customer base, increasing productivity, a lot of, use of technology. So we had that rise in the late seventies of income. And then we had things like inflation and falling apart, trading partners and vast other things that sort of led to that decline, across the economy, but was particularly hard hit here in the ag sector. Right? And so that, that eighties, which was a, was a astronomical rise and fall that seventies, eighties period. Now as we start to collect more time starts to look more like a little bump.

Michael Langemeier: Yeah.

Todd Kuethe: Right. And that’s because we had sort of a rebuilding period in the 1990s. And then sort of post RFS, I think is where we can start to really see the break in terms of aggregate land values in the country shooting up.

And this year, the USDA report that just came out in August, puts national at $4,350 an acre. One of the things I always have to point out is a couple pieces of information related to this. One is the USDA, the base source of information is what they call the June area survey, which I believe used to be called the June agricultural Survey. And that’s predominantly to track product production. But they also ask about land values and cash rents. And so they, they’re serving thousands and thousands of farmers. These are farmer reported. And then statisticians sort of across the USDA are making adjustments and considering that data, to produce sort of state level and national estimates.

And so that national, this is all of the U.S. so it moves very slowly, even at that, you can see we’ve had a really strong uptick, particularly since 2020, uptick like we observed sort of in that 2005- 2010 period.

Michael Langemeier: Yeah. It’s truly, truly remarkable. On this graph and other graphs looking at land values is the sharp increase since 2007. I mean, the difference that ethanol made in terms of prices is well documented, but it’s also well documented that the increase in prices, just shot up after that. And even in the U.S. numbers here, it more than doubled. The land values more than doubled since 2007. The increase has probably been two and a half to three times, in some of the corn belt states in terms of land values.

And so obviously that was a very important time period, for agriculture. It continues today. I mean, we use 35 to 40% of our corn crop for the ethanol industry. And so, that’s truly remarkable.

I want you to comment a little bit on, the difference in cash rents from the USDA survey, versus the Indiana, you know, Purdue survey or Iowa survey, or Illinois survey. Because they are different. I mean, typically the USDA numbers are lower, than the numbers coming from the state surveys.

Todd Kuethe: Well, so one of the things is, again, all the USDA surveys are coming from farmers, right? So like the survey that we do here at Purdue, we’re surveying people that interact with the land market as part of their general profession. But it’s usually people like farm managers, appraisers, brokers, lenders, and so they interact a lot more with, sort of professionally managed land, for lack of a better term.

The USDA also, when they survey a farm. They just ask about the sort of average cash rent on the land that they operate. And as you know here in the corn belt, particularly commercial farms where they’re supporting a household with farm income, they’re dealing with multiple landlords. Right. And so there’s a huge variation. I think even within a farm, what they’re paying for different parcels,

Michael Langemeier: I think that key word there is USDA is more average. Yes. Whereas the, the state, the state numbers are really up, really marginal, if you will. They’re on, they’re on the edge. This is what this is. If a, if a track came up to rent, this is what we would expect, to rent that track for now, what the average is for all the forms that all the farm in the area, but this is what that track would rent for. And those are, those are two different numbers, if you stop to think about. So that’s, that’s really good.

And I think I wanted to ask you that question. The USDA probably does not separate out arm’s length. Do they separate out arm’s length transactions from non-arm’s length?

Todd Kuethe: It’s been a while since I’ve read the survey documentation. But no, they just ask what is sort of the average cash rent you are paying this year?

Michael Langemeier: So you’ve got some rental rates there that might be with people, you know, relatives that might be quite low.

Todd Kuethe: And again, I think one of the reasons that the USDI moves so slowly is there for everybody that’s, getting a sweetheart deal from a relative and paying low rent. There’s also somebody overpaying the rent.

Michael Langemeier: Yes.

Todd Kuethe: ‘Cause they’re trying to like, get some money to their parents.

Michael Langemeier: Yes.

Todd Kuethe: That won’t pay for the nursing home without, so you pay overpay the rent to give ’em the cash. There’s all these sort of things where you start looking into the details.

The other, the analogy I often use at the USDA numbers is that it’s like a glacier. Like it’s moving in the right direction. And a glacier will. Change speed and change direction, but it takes a huge force or just a sustained force to do so. Right. So this is kind of that glacial trend of like what’s generally happening in the land market.

The, the other thing I wanted to point out, Michael here, since you asked about the differences, it’s also sort of what we’re capturing the value of. So on our survey, for example, we ask about cropland. And, I know that the Federal Reserve surveys, they’ll say bare farmland. But here the USDA uses the term farm real estate. Yeah. Because that is buildings as well as structures and improvements. So if you have things like tile drainage. Or hog barns or whatever, like that should be all captured in this sort of real estate.

Michael Langemeier: I mean,. I mean, there’s quite a few things that could be captured in that value.

Todd Kuethe: It does omit the, operator’s dwelling, I believe.

Michael Langemeier: Yeah.

Todd Kuethe: But anything that’s sort of a building and improvement related to farm production is value is in there.

Michael Langemeier: Now let’s talk a little bit about the trends in Illinois, Indiana and Iowa compared to the U.S. And I always find this rather fascinating.

Todd Kuethe: So a couple things. One that I always point out is that gold line from the previous, with the national, when you start looking at the, at the sort of the I state. It looks virtually flat. And if we go back farther, like pre 1950, the, the, the U.S. and the corn belt area sort of moved the same. They didn’t move much. But really starting in the early seventies to mid seventies is when you really start to see a gap between Illinois, Iowa, Indiana, and the U.S. and aggregate.

And then among those three states, the I states, Iowa seems to be the most dynamic. It has the steepest inclines and declines. And then Indiana, at least over sort of the last kind of 15 to 20 years has been sort of the most stable. And in a lot of years, sort of the lowest, even though it used to kind of hang in the middle between Illinois and Iowa. And then also, ’cause I used to work at the University of Illinois. I started putting this together because, the farmers would like, there was a rivalry between Iowa and Illinois. Anytime I would say like the Iowa numbers went down, the crowd would cheer. And I, like, you can’t not have something the crowd would cheer for.

Michael Langemeier: I was in Illinois yesterday and I told the audience that Iowa adjust more, and then Indiana is the least of the three, and then Illinois is in between. And I think that’s what the chart essentially is saying.

The reason why this is important is, this is a land value chart, but Iowa has seen a little bit more weakness in cash rents this year. And, you know, maybe that’s hearkening to what we might see in a year or two. Because they typically move fast.

Todd Kuethe: I’ve heard a number of people say that what happens in Indiana happened in Iowa last year. Right. That seems to be a.

Michael Langemeier: So that’s why we kind of look at those, look at all three of those.

And then I wanna talk a little bit about a slide from the Ag Economy Barometer. Again, this is the July survey. We do this every month. Uh, but here’s how it’s worded compared to today. What are your expectations for farmland prices in your area 12 months from now? And so we don’t. We just say farmland. This could be pasture, this could be crop land. But this kind of gives us a gauge from the U.S. perspective, on what’s happening to prices. And, in the July survey, 29% thought that they thought land prices were gonna increase in the next 12 months, 14% lower. That’s been fairly consistent here. Since the first of the year. And so, and so what that tells me here that, there’s still more optimism than pessimism, in U.S. farmland.

Todd Kuethe: The way I always think about it is I take the optimist and I subtract the

Michael Langemeier: Yes, that’s a good way to look at it.

Todd Kuethe: pessimist. And so we’re at like a positive 15.

Michael Langemeier: Yeah.

Todd Kuethe: Which means there’s like, you know, a bit of, optimism or upward pressure.

Michael Langemeier: Yeah.

Todd Kuethe: I don’t know if they, everybody’s optimistic about prices going up, but, they believe prices will go up a little bit if compare that, particularly when we think about like, coming out of COVID in like 2021, where we had very few people expecting lower prices and know the bulk of people saying higher, right?

Michael Langemeier: Yeah, yeah. Definitely. When we were in that double digit, increase in prices we had. We had 50, 60, 60 5% of the people thinking that prices are gonna be higher. Now we come down to Earth a little bit. And it’s, it’s right. 29%.

Todd Kuethe: Well, and that missing group, right? That other sort of Yeah. Little over half. Or, or thinking stable, remain the same. Right. Remain and they’re kind of thinking stable.

Michael Langemeier: Yeah. Right. And that’s about 50% right now. And that’s kind of consistent with our expectations, which we’ll get into here.

[00:13:27] Indiana Farmland Values
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Michael Langemeier: Now let’s turn to the Purdue farmland value and cash rent survey, focusing on the land values. And so give us a little history of this survey, and what numbers are reported. In the report that’s on the Center for Commercial Agriculture website.

Todd Kuethe: Yeah, so, this survey has been around, since the mid 1970s. Our department has done this annually, and it was initially created because there was very little information about land markets, around Indiana, right? So it was created by, some faculty here and working with stakeholders around the state. And a lot of our respondents are still people of similar professions. I don’t know how many of ’em are still working since the mid seventies, but, um, they, they’re generally people that interact with the land market as part of their, regular professional life. And so we’re looking at a lot of rural appraisers, farm managers, brokers, ag lenders, and a few farmers in there as well. But it’s generally, people that, sort of in the land market professionally.

And we do ask about both land values and cash rents, but really what we’re looking for primary respondents is people that. Can speak, or give information, about the land prices. And so we collect three different prices. So this survey goes out in June, so we always ask about the current June. But then we also ask about the previous December, where it was to end the last year. In part ’cause we’re also wanting to know what do they think is going on for the rest of the year? Where do they see it the next, this coming or projection for the end of, this, 2025.

And so we asked the respondents about, average land prices that they’re seeing in their county that they operate, or work in. And then we aggregate that up to six regions across the state and at the state level. And we ask them about the land prices for three quality grades, top, average, and poor. And we don’t define those. We just ask them. And then we also ask them to report their long run corn yield expectation for top average and poor quality land in that county.

So that allows us to translate things, prices to bushels yielded, and can help control for those quality difference, right? So a top quality land in the southern part of the state is very different than what we think of top quality land in the northern part of the state.

Michael Langemeier: So let’s get into some of the numbers. Before we get into the land values, we’ve just got a couple, slides on cash rents. We’ve covered this in another podcast. But just briefly talk a little bit about, what cash rents did in 2025, Todd?

Todd Kuethe: Yeah. So, these two numbers, at least according to economic theory should be linked.

Michael Langemeier: Yes.

Todd Kuethe: Right? We should expect sort of an equilibrium relationship there. And we’ve seen cash rents increase by one and a half to 2%, at the statewide average, over the last, year. And that’s similar to what we’ve seen in the last couple years. So they’re ticking up gradually.

Michael Langemeier: And even though these two numbers are linked, we’re gonna talk about some factors that impact land values. That’s one of extremely beneficial, pieces of information in the survey report, as we talk about, 11 different factors and how they might impact land values.

When we talk about cash, rents, the main factors, net return to land. And so that’s the main factor. When you talk about land, it’s more complicated than that. There’s a lot of other things that impact land values, and so even those, these are two linked. They can move in different directions and they certainly can increase or decrease in different magnitudes because land values does have all these other factors. So keep that in mind when you’re looking at the report. Let’s get into the 2025, state averages by land quality.

Todd Kuethe: Yeah. So if we look at, the, survey results across the state of Indiana, we’ve seen, sort of. Middle level, increases. Yeah, so thinking about like 2020-2021 where we had like a real uptick, we’re not there. But they’re not exactly flat. They’re moving up a little bit, higher than the, the rate of inflation. But we’ve seen sort of a, sort of three to seven or 8% increase, across the state. For top quality land, we’re now looking at, almost $15,000 an acre. $14,826. For average, we’re at, $12,250. And then at the poor quality land, we’re looking at about, $ 9,761, I guess is what we have here. So about, almost 10,000. Um. Per acre.

Michael Langemeier: I don’t wanna read too much into this, but I was a little surprised at the, the large increase in poor quality ground because if there’s any ground that, where the net return to land is probably not very good, in ’25, it’s, this is, this poor quality land. Do you have any thoughts on that, Todd, for why that might have been a little higher than the other two?

Todd Kuethe: Okay, so there’s a couple things. One that’s sort of like evergreen belief, which is that poor quality land is like the the hardest to derive a value from, you see the most dispersion, right? ’cause some people are buying it for recreational purposes or, you know, they, they are gonna grow crops on ’em, but they mostly want to deer hunt or something, right?

Michael Langemeier: Yeah.

Todd Kuethe: Um, and, and we see sort of smaller plots and, and sort of like, you know, people other than just farmers buying them. And those will sort of like come and go. The other thing, poor quality land is sometimes used for is livestock, right? So we have higher livestock returns. It could be some of this poor quality land is on that margin between do we use it for pasture or do we use it for,

Michael Langemeier: Even hay.

Todd Kuethe: or silage. Yeah, or hay.

Michael Langemeier: Even hay. Something like that.

Now that average at five, five and a half percent, that’s not too different than the historical average return on land.

Todd Kuethe: Yeah. That’s about what we, sort of see kind of over the last 25 years.

Michael Langemeier: You kind of put that in perspective. And, we are talking about the fact that the report, that has the cash rents and land values is in the August PAER (Purdue Ag Econ Report) report. In that PAER report, there’s also an article looking at investment returns for land and other assets. And so take a look at that and see how land compared to some other assets.

Todd Kuethe: Yeah, I had a outstanding graduate student work with me on this in that it’s. The thing that comes up all the time. ’cause farmers are so heavily invested land, like we said at the top of the podcast, right, that they wanna know, well what, what would my money be like or returns be like if I put it in something else?

Um, and so once again, we find land sort of sits in the middle of all of our investment opportunities and that it offers a higher return than just the, you know, just buying bonds. Right? Yeah. The safest, investments. But not as much risk exposure as we see in like equities.

Michael Langemeier: Yeah. Certainly when you compare farmland to the S&P 500, the S&P 500 is considerably more risky. And so you wouldn’t expect to get the same rate of return long term as you would with the S&P 500, because there are differences in risk. And so, that article talks a little bit about, differences in risks too.

I just wanted to make a note that there are regional farmland values in the report.

We’re not gonna, dwell on those other than saying that, there was some different trends between the north and the South this year and, that, that’s not that unusual. But, it was rather obvious this year. And so if you could just talk a little bit about that.

Todd Kuethe: Yeah, so there’s a couple things. The Southwest and southeast regions had a decline in land values relative to the year before. Where all of the other, northern two thirds, had an increase of varying degrees by, different parts of the state. If you remember over the last couple years, the southwest and southeast regions have been growing the fastest, right?

So again, sort of like when we’re talking about comparing Iowa and Illinois, we also tend to see places that are increasing the most are often the sort of first to, to decline.

Michael Langemeier: Yeah.

Todd Kuethe: That’s sort of generally true of, of, of the economy. And then also I think, all of the factors that we think about when we talk about what drives the land market, those are different in the south southern part of state in the north. Right. So you’re looking at different commodity mix. You’re looking at different land use or development potential.

Michael Langemeier: Yeah. So there’s a lot, you know, we’re gonna talk about the factors here, but the factors would vary, by region. Let’s take a look at it, kinda historical trends since the late 1970s and top average in poor quality land in Indiana.

Todd Kuethe: Yeah, so the survey was started again to provide land information, for Indiana stakeholders. And then, the report was able to survive even though the first thing that happened was we see that early eighties, land price decline. Right.

And then it was relatively stable from kind of the late eighties through 2007-2008. Just like we talk about the national level, right? And then we have this sort of post RFS, commodity price boom. And we see prices really shoot up quite a bit. And then sort of 2013 to 2019 prices moderated or held a little bit stable. And then the most important thing happened, I took over the survey.

Michael Langemeier: Yeah. And then prices just shot up.

Todd Kuethe: And prices shot up. Yeah. No, it’s, COVID, right? So the sort of post COVID period is when we see another sort of dramatic increase, again, not as much as we did see that ’20-’21, increase, but we still have seen that sort of continued increase over the last few years.

Michael Langemeier: And just to put this in perspective, since 2007, you look at average quality land, it’s close to a tripling. You don’t necessarily expect that to happen for the next 25 years, but certainly since 2007, we’ve had extremely strong rates of return, for both poor, average and top quality land in Indiana.

Now let’s talk a little bit about the land value factors. There’s 11 of these. 10 of these have been in the survey for a long time, and you added the conversion recently. And so, uh, so talk a little bit about, which one of these are negative, and which one of these are positive in terms of, explaining land values?

Todd Kuethe: Yeah. So, this is my favorite part of the survey. This is the part that I enjoy the most. Uh, well, this in the comments when I get some, yeah. ’cause some of the comments are pretty fun. Um.

So we ask all of the respondents about these things that we generally associate with moving land prices. And we say, is this a positive force? Is it pushing land prices up or a negative force in your area? And we have ’em rate on a scale of, five positive, five being a strong positive. Negative five being a strong negative force. Zero, then of course being neutral doesn’t really matter, right? And so we look at the average of those scores. So when the value is greater than zero, then we say on aggregate it seems like this is putting upward pressure. And when it’s less than zero, then it’s negative pressure. And we can sort of compare across those different categories, but we can also look at how that’s changed over time.

So the graph that I have in the report, I always show sort of the last three years. So if we look at what is putting downward pressure, we’re seeing an increased downward pressure relative to last year for net income. A lot of that I think is the downward pressure we’re seeing in crop prices. In fact, the livestock price is actually one of the things putting upward pressure, but crop price, putting downward pressure.

Interest rates, again, is still negative as it has been in the last several years. But it does show a much more muted effect. I think people have kind of gotten used to the interest rates that we have, or maybe they’re thinking, oh, rates will come down a little bit and so it’s not quite as, much of a driver.

There’s also a little bit of downward pressure from the return to alternative investments, so maybe investors are looking other places.

And then exports of ag commodities, we ask about inflation. It’s putting a little bit of upward pressure. But again, not very strong. Same thing with farmers liquidity. How much cash do farmers have on reserve to buy land or invest in their farms? Positive pressure, but again, way lower than it was a few years ago.

Agricultural policy, interesting enough, it’s it’s very small number. But it is negative, which I think is sort of weird. I was kind of surprised I was, anytime they think that ag policy is not supporting lands, I’m always a little bit curious.

Michael Langemeier: It probably asks fairly generically, does it just say ag policy?

Todd Kuethe: Agricultural policy.

Michael Langemeier: I don’t wanna read too much into that, but I think that’s, I talk when I think ag policy, I think safety. And Yes, and the safety net actually was strengthened, with the legislation that came out this summer. Some of these might have answered the survey before that, but I think also when they talk about ag policy, probably we’re thinking about tariffs.

Todd Kuethe: Yeah. And

Michael Langemeier: Certainly the negative tariffs were,

Todd Kuethe: it could be, it could be tariffs, it could be tax policy. It could, they could be anything. It could a lot. There’s so much stuff that’s policy.

Michael Langemeier: But that typically isn’t a real large bar. I mean, when you took a look at the large, the large bars in the last several years, obviously net income is.

It was, it was hugely positive in ’23. Now it’s, it’s quite negative. That one moved a lot. Liquidity moved a lot. As, like you said, it was really strong in ’23. It’s still positive, but it’s down a little bit. Then one you haven’t talked about here that I I’m glad you added it. It was, it is conversion.

Todd Kuethe: Yeah. So I actually, I added it to last year’s survey and I think I mentioned it in the report but didn’t have it in the graph. And I was waiting until I had at least two years so we could see if it, how it’s moving. And so we ask about land conversion. Now I use the term conversion. Specifically, the survey for a long time we’ve asked about land transitioning out of agricultural production, and we’ve asked about, recreational land. But I use the term conversion because what we’re seeing across the state, and across the corn belt in general right, is not just, converting to subdivisions and golf courses. Like we see sort of a sort of traditional spread, but we’re seeing a lot of like infrastructure development, um, or new, like large civic projects or things like conversion to, energy. So solar energy, and wind. So asking about like, how much do you think conversion is, what’s driving? And again, it’s, it’s the strongest positive force that we’ve, of the factors people have identified.

Michael Langemeier: Yeah. And I think when you combine all these factors, I think it explains why the land prices went up a little bit, but not nothing like they did a couple years ago.

Todd Kuethe: Yeah. And if you look back, I mean, all the way back to, I think it was 2020, 2021, everything that could impact land prices was pushing it up. And we did see record growth.

Michael Langemeier: Yeah.

Todd Kuethe: Right. And so yeah, you’re right. I look at that sort of how, how tall are these bars? But also how many are pointing up, how many are pointing down?

Michael Langemeier: Let’s take a look at the projections. You take the, you have a June 25 number and then you have a December 25 number. What did they come up with in terms of the projected increases in land values, in the next six months?

Todd Kuethe: So they’re actually, I would say modestly optimistic. Expect to see some growth, particularly for the poor and average quality land. I would say sort of guarded optimism. They think prices will come up, but not like it’s gonna be gangbusters. But I was also sort of relieved that they weren’t predicting declines. Often it seems like if you go back to the old reports, they actually tend to expect declines. A little more pessimistic audience.

Michael Langemeier: Yeah. They’re still, they’re higher than inflation.

Todd Kuethe: Yes.

Michael Langemeier: And so I think that’s very important to point out, and I think they’re very consistent with, again, that this historical averages, that we’ve seen over a long period of time, that five to 5.5%. Very consistent with that.

Now, a couple of the things that are in the report here that would be of interest to people, in areas that are transitioning out of agriculture, i.e. around Indy and other large cities like that. You’ve got some questions related to, transition values per acre and you call this a development premium. So talk a little bit about, what that is in ’25 and how that’s changed. It looks to me like this has changed a little bit, in the last few years.

Todd Kuethe: Yeah. So we asked specifically about the price paid per acre for land transitioning out of agriculture into some other use. Right. We do tend to think about that in terms of like suburban development kind of things, but it’s not limited to that. Post 2020, we saw an explosion in the value of transitional land, and a real demand for people, there was all the story, new stories around COVID of like people wanting to move outta the country, get away from congested areas or whatever, right?

And then this year we actually saw a little bit of a decline, in what we’re seeing that transitional value. But I often look at sort of, I call the development premium ’cause I look at how does that transitional land compared to top quality land. And as a rule of thumb, over the last, you know, 15, 20 years, any farmer will sort of sell their land for twice the price, right? Or twice the value they get for agricultural. And so that’s sort of the, the premium I kind of look at it. What is that gap between the transition and average? And if you flip forward for those viewing, this actually tracks really well with construction permits, right?

So this is Indiana State level information on housing permits. If you look in the 1990s, we had very high development premiums. And we had a lot of construction. And then it really slowed kind of around that housing crisis. And actually in Indiana hit here a little first that we had slow down. And then it’s been sort of gradually rebuilding.

That development premium basically follows that lock step, as construction slows down, there’s a lot less conversion of farmland. And then as that starts to tick, tick back up, we start to see it come up. In the last year they’ve both come down a little but the overall trend of the last 10 years is gradually up.

Michael Langemeier: Now we always have a caution about, using values directly outta the report. There’s a lot of variability in farmland values. There’s particularly a lot of variability in transition values. And so, yes, just to note that, I mean, when you have an average around $27-28,000, I mean, there’s obviously tracks are gonna double that. So there’s a lot of noise there. We’re not trying to pick up all of that variability, we’re just trying to pick up, what does that look like compared to, average and top farmland.

Todd Kuethe: Yeah. ’cause I mean, transitional land is almost like snowflakes.

Michael Langemeier: Yeah.

Todd Kuethe: Where they’re like, each is sort of unique.

Michael Langemeier: Yeah.

Todd Kuethe: And every time I present this somewhere, somebody’s like, well, do you know about this one here? That this one? Like, and I don’t know about that specific one, probably. Right. But generally, this is kind of the momentum or the trend that we’re seeing. Right. Yeah.

Michael Langemeier: So let’s, summarize the information in the report, and then we’ll kind of switch gears here a little bit and talk about, some more about factors impacting land values.

Todd Kuethe: So, I sort of put it here at the end ’cause I feel like when you’re writing a land value report, you get almost every year title it, new record high.

Michael Langemeier: Yeah.

Todd Kuethe: Tends to trend up. But we used that again at the state level. But the difference is what we’re seeing is more of a diversion or compared to the last several years between the southern third of the state and the northern two thirds, where we saw a dip in decline in land values. And depending on the quality grade, we’re looking sort of across a big area, I’m sure there are local markets that had even more extreme declines. Or even some increases, right? But generally that bottom third of the state has been declining. And we see an increase across the other, two thirds of the state.

The key drivers, impacting the market this summer, and I think we’ll have to continue to think about them going into next year, are lower returns, lower incomes, lower crop prices, and how that’s putting downward pressure. And again, on the upward pressure. A lot of it’s still land conversion. How much of, how much continued development are we gonna see, going into the next couple years?

And generally, the respondents are optimistic about prices or should say they’re expecting prices to increase through the remainder of the year, which is, not rare, but, not the most common. Right? We have a sort of, it seems like people are always pessimistic about the land market, but not this year.

[00:32:09] Farmland Outlook
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Michael Langemeier: Now for those of you that wanna dig a little deeper, we’re gonna talk about some of the key factors impacting farmland values. And so we’re gonna go over this, relatively fast, but there are slides, related to those. Again, for those that want to really think about what impacts farmland values and when we talk about fundamentals, what are we talking about, in terms of fundamentals? And Todd, so let’s just ask you the question, when we think about a simple model of farmland prices, what are the fundamentals that we think about?

Todd Kuethe: So I usually, when I present this to an audience, I put a little break in here ’cause I tell ’em there’s gonna be some math on the next slide. Uh, and so, uh, this, we may have just lost most of our audience here, but. It’s what we learn in Economics, Finance 101, net present value, right? So the value of any asset that we own is based on how much we think we can earn by having it, right.

So we think about the price of farmland generally. As a rule of thumb, we look at all of the ways we could make money from farmland. So we could cash rent it out, we could farm it ourselves, we could develop it into something else, right? Those expected returns. And then we discount those. So we divide them by some discount rate. And that’s because we want money now, not in the future, right? So we’re worried the future might not happen, right? And so anything that you’re going to pay me next year, I’m not gonna put as much confidence in that as what you’ll pay me this year.

And I think if you think about just those two factors that’s what describes a lot of the variation that we see in land prices, but it also describes when you go to like an auction or people are talking about recent sales, a lot of what the diversion will be will really be like, oh, I think this could be that expected return.

Michael Langemeier: Or, or I think the discount rate’s different.

Todd Kuethe: Or, yeah, or I think that expected return could grow or I, you know, if I manage this, I could get those costs down or whatever. It should be worth more.

Or they discount future returns differently. And so I often use the analogy of like. It’s the difference between loaning money to my wife or loaning money to my kids. So my teenage kids, I would’ve a much higher discount rate in terms of probability I’ll actually get paid back in the future.

Michael Langemeier: And one of the reasons why we’re talking about this is the discount rate and the growth rate when you combine those two is only about 2%. 2.2%. 2.1%, 2.2% in there. That’s called the capitalization rate. Typically it’s really low right now. And what these slides, talk about is what would happen if that capitalization rate increased?

If, and why would that increase? Will the interest rates stay high? There probably will be at least somewhat upward pressure on that discount rate, slash capitalization rate. These slides kind of look at how sensitive, land prices really are, to increases in discount rate and increases in decreases in expected returns.

One of the things you have here also is looking at a farm income forecast. This is, we could spend a lot of time on this slide. We’re not going to, but for farm income is forecast to be quite high, in 2025.

Todd Kuethe: One of the things that’s gonna drive us how much money we can expect to earn it. Right. So I look at the USDA farm income forecast, to give me an understanding of like, where is the ag sector at large. So if we’re looking at particular county in Indiana, it’s much better to look at like prices and yields in that area.

Michael Langemeier: Yeah.

Todd Kuethe: But if we’re looking at sort of nation as a whole, what I think is gonna happen to land prices, the best source of information is USDA. And so they do a farm income forecast. So they produce an estimate, what they call their estimate. Or their official measure of net farm income, which is sort of the value that the agriculture sector generates and, and a retained earnings, I guess. Right. And, and this is sort of a, like a system of national accounts, so we’ve got all the different kinds of agriculture and so we’ll have places where it’s rising and falling different commodities, but this is sort of what’s the aggregate picture look like? A year to put out after the year Indy close. So we, we find out in August or September how the previous year did, so to provide more timely information, they forecast it several times a year.

Michael Langemeier: Yeah.

Todd Kuethe: And so there’s a lot of stuff in the ag media, like when it says like U SDA is forecasting farm income to do this or that.

So I’ve been for a number of years just sort of tracking how that forecast evolves. And so they’re saying for 2025, now this is based on the February forecast.

Michael Langemeier: Yes.

Todd Kuethe: They’ve got a new one coming out shortly.

Michael Langemeier: In early September.

Todd Kuethe: Yes. So we’ll, we’ll see some adjustment likely. That’s when we’ll find out what actually happened in 2024.

Michael Langemeier: Yeah.

Todd Kuethe: When that September report comes out. But generally over the last 20 years, 25 years. The aggregate number ends up actually coming in higher than the initial forecast. So they’re saying they’re expecting a profitable year. There’s a chance if the pattern holds. They will actually come in a little bit higher than that. Weird to say this at this current time.

Michael Langemeier: But I, you, you gotta remember, there’s a lot of different numbers that are going into that net farm income forecast. And, and, and here in here where we’re here in a state where, where, crop income is so critical, and two of the forecast in terms of Indiana, you gotta remember the U.S. livestock is more important, relatively more important, particularly as you get into the Great Plains. And I’m hearing that the net farm income ‘ 25 coming out in September could be higher than the February number because livestock processes are actually stronger than we thought they were going to be early in the year. And also, you go back to the revision of the safety net, that happened this summer. The safety net payments are probably higher. And you combine those things with relatively low, crop returns and you’re still looking at a pretty high, net farm income forecast.

Todd Kuethe: And historically that sort of, what I call here the August, or it’ll be September this year, that number actually in more years than not, is more optimistic than we had in February.

Michael Langemeier: Yeah. Just a reminder that, you know, obviously cash rents are very important to land values. We’ve talked about that before. They were up slightly well in ’25.

Todd Kuethe: And cash rent is where I actually think of as like sort of a local measure of potential return, right? So the joke I always make, is that the easiest way to make money for farmland is just rent it to somebody else. Have them do the hard work. That sort of gives us kind of a baseline expectation of what we think we could earn.

Michael Langemeier: Even though in the net present value model, it’s expected returns. A lot of us use cash rents as a proxy for expected returns, but you could use expected returns for a specific farm, in that forecast. Just be careful when you’re doing that. It’s expected returns, not the return you had in ’25 or ’21 or some kind of historical return like that.

The other thing that I just wanted to note briefly is discount rates are higher. Right now, we do expect a little bit of softening, perhaps coming here in the next month or two, when the fed, talks about interest rates again. They’re up quite a bit from what they were, two, three years ago.

Todd Kuethe: Yeah. And I have, for those watching three different discount rates here, right? So the bottom is the Fed funds rate. So that’s what the Fed sets for the overnight deposit rate, right? So that’s set by policy.

The prime rate is, generally what banks give for short run loans to their best business customers. And so that’s sort of the difference between the prime and the Fed funds rate is kind of the bank’s cost of doing business. And that stays relatively stable.

And then the other one is the farm mortgage rate, which I got from the Federal Reserve Bank of Chicago. So that does include the northern two thirds of Indiana, but it also has Southern Peninsula, Michigan, a little bit of Wisconsin, all of Iowa and northern two thirds of Illinois as well. So it’s a little, you know, kind of the corn belt area. And I often look at sort of that, the difference between the farm mortgage rate. And the prime rate or the difference between farm mortgage rate and the Fed funds rate?

Michael Langemeier: Yeah.

Todd Kuethe: Because I have a lot of people that will say to me like, oh, the Fed’s gonna do this. What’s that gonna do to the land market? Those two things do move together, but it’s not as lockstep.

Michael Langemeier: Yes.

Todd Kuethe: So we’ve seen, over the last, several quarters where we see farm mortgage rates coming down, we also have seen, the federal funds rate coming down. When we see the farm federal funds rate. Shift up. We often see the foreign, but it’s not a one-to-one correspondence. Right.

Michael Langemeier: Yeah.

Todd Kuethe: I don’t think the Fed is controlling mortgage rates. They’re influencing it.

Michael Langemeier: Yes.

Todd Kuethe: Um, but the bank activity in the, in the organic market is,

Michael Langemeier: Part of it is the length of loan. Tend to think that the prime rate’s more of a short term rate.

Todd Kuethe: Yes, that’s exactly.

Michael Langemeier: It’s more correlated with the operating, interest rate and operating interest rates do not necessarily, perfectly correlate with mortgage rates because it’s a different timeframe. One’s a year and one once a much longer than that. And so, you know, sometimes we discount the future more. Sometimes we don’t. So there could be differences in those over time. And we’re kind of seeing that in this chart here, for a period of time there, quite a long period of time there, the mortgage rate was quite a bit above the prime. Now it’s pretty block step, since 2020.

Todd Kuethe: Well, and the other one I think about, or I talk to my students about that. I always say, if you tell about the difference between operating and real estate loans. If somebody defaults on a farm mortgage, the bank owns a farm. Yeah. If somebody defaults on a, operating loan, then maybe they get the grain in storage or something.

Which would you rather have? And we’re at a case where, like right now we would rather have the mortgage. So that’s why we see the sort of the downward pressure on those rates.

Michael Langemeier: Good point. Just a couple other things here to kind of wrap up. I did wanna talk a little bit about, rent ratios. The capitalization rates we’ve talked, before is essentially cash rent divided by land value. If you look at the regional, land values, the capitalization rates from two to 2.5, where the state average is about, I think 2.1, 2.2, someplace in there at the lower end of that range. but the historical average is five. All that means is there’s been some periods over the last 50, 60 years where the capitalization rate was considerably above, the two to 2.5. So you always have to ask your question. We’re gonna revert back to the mean, probably not anytime soon. That’s kind of what our thought process is here.

What I’ve done here in the P/rent ratio is, I’ve just inverted that. So rather than doing cash rent divided by farmland price, I do farmland price divided by cash rent. And this is analogous to the PE ratio, that’s used to look at the stock market.

For example, right now, the PE ratio is around 35. for the s and p 500. and so that just give you a frame of reference there. The historical p/rent ratio is 20. ‘Cause you know, 5% inverted is 20. But in 2025, it’s 40 to 50, depending on, the region, of Indiana that you look at.

So it is high. Uh, so the question naturally to ask here, just like if we had a high PE ratio, are we overvaluing land? Well, the short answer is. We don’t think so. We’re overvaluing land, but I do wanna have a word of caution here. If you have a relatively high, p rent ratio, what does that imply about the future earnings, for that, investment in real estate?

And the way to think about this, if you have a relatively high, farmland to rent ratio, that means that the farmland was relatively expensive, compared to the cash rent that could be generated from that.

And so you wonder, you ask yourself, could there be buyer’s remorse? I paid quite a bit for this land. Maybe I paid a little too much based on the fundamentals. Cash rent being the fundamental. And so maybe my rate of return, will not be real strong, in some of these years where the p rent ratio was relatively high or farmland prices increased faster than cash rent, which was, in recent years that has been the case.

And so I, I’ve got a chart of the, historical, P/rent ratio, you know, just showing the average and, and where we’ve been at, since 1960. Essentially from 1960 to 2004, 2005. Right before RFS, we were below, the, the, the 20. And then since there we’ve been above the 20. And really, Todd, that’s, reflecting the change in interest rates, the capitalization rate’s been lower, in recent years compared to what it was historically. And so that’s what that’s illustrating.

And then I look at the negative relationship between 10 year rate of return and P/rent 10 ratio. And so if the P/rent 10 ratio is relatively high. Meaning farmland price compared to the 10 year average earnings is relatively high, that implies that, perhaps the rate of returns can be a little bit lower, than it would’ve been if we’d have bought land at a lower P/rent ratio.

And so I, I’ve got a slide that illustrates that and sure enough. If we look at the latest number in 2015, we were looking at a rate of return there of 5%, which is a little bit lower, than the long run of rate of return. it just implies that there is a negative relationship between these two. So if you do buy at a higher P/rent 10 ratio, you do tend to have a little bit lower return.

But this chart is looking at 10 year rates of return going back to 1960. That average slight negative to 20%. That seems like a large range. That’s tiny compared to the stock market. Okay? And so just remember that when you’re looking at this chart, that yes, there is a negative relationship between these two. And if you do buy land when it’s relatively expensive compared to cash rent, you would expect a slightly lower rate of return. But quite frankly, even the 25, 15 number 5%, it’s not too bad. You add cash rent to that and you’re looking at, you know, seven and half, 8% return, for land in the last 10 years. Not too bad.

I also encourage you to take a look at the, relationship between the 20 year rate of return, and the P rent 10 ratio. And the reason why I really like this chart, Todd, is the first time I showed this to one of my colleagues. They said, holy cow. If you look at rates of return from 1960 up to the current period, the most recent being 2005, ’cause we had to have 20 years of data, they range from six to 14%. That’s not too bad.

Again, compare that to the stock market. Even six percent’s the worst, in terms of the 20 year rate of return. And we had several years there where it was over 10%, probably half the time, the rate of return was over 10% and that’s before the cash rent’s added. And so what this clearly shows is there’s a negative relationship, but also shows that land’s had a pretty good rate of return, since 1960.

And so I encourage you to take a look at the report, look at the cash rents and land values. It looks at rates of return of farmland compared to other assets. And then take a look at, these P/rent ratios, and, read through that.

A lot of good information in that August PAER report. So thanks for joining us. Just a reminder that there is a separate, podcast for cash rent, so we also encourage you to listen to that podcast.

Todd Kuethe: Thank you.