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What is farmland worth?

If you operate farmland belonging to someone else, how much less cash rent would you have to pay if farm program payments were eliminated? Or if we ask the farmland owner the same question, how much less cash rent would you charge if government program payments were out of the picture?

First, don't fret that farm program payments are going to evaporate over the winter and you'll have a whole new farm economy in 2007! The question is posed as part of an exercise to determine farmland values, which to no one's surprise, are affected by farm program payments. Let’s take a look at the potential answer.

Kansas State ag economists Terry Kastens and Kevin Dhuyvetter have published a pair of research reports on land values. The issue at hand is the question posed about how government payments and non-agricultural returns affect land values.

It is obvious that recent years have brought increases in land values due to increases in farm program payments. Without those, if farmland value was a result of farm income, Kastens and Dhuyvetter say an agricultural capitalization rate could be calculated by dividing cash rent by land value. They worked on that calculation, using rent to value ratios from 1951 to 1972 when land values were dominated by their worth as a commodity producing asset.

Now move ahead 30 years and apply those capitalization rates to current cash rents and calculate land values in a farming only economy. Kastens and Dhuyvetter label that as the "agricultural market value percentage" which indicates Corn Belt land values would be only a portion of what they are today:

  • Illinois: 54.5%
  • Indiana: 44.5%
  • Iowa: 60.5%
  • Kansas: 60.7%
  • Michigan: 19.4%
  • Minnesota: 50.4%
  • Missouri: 51.4%
  • Nebraska: 65.7%
  • North Dakota: 75.8%
  • Ohio: 43.4%
  • South Dakota: 55.6%
  • Wisconsin: 25.4%

The Kansas State ag economists then computed the ag-only value of land by multiplying the average land values in those respective states by that percentage, and coming up with the portion of 2006 agricultural crop land value attributed to government payments. This figure is "based off the average relationship between government payments and crop land cash rents over the 1951-2006 time period."

  • Illinois: 25.9%
  • Indiana: 25.1%
  • Iowa: 30.8%
  • Kansas: 49.8%
  • Michigan: 46.4%
  • Minnesota: 36%
  • Missouri: 29.3%
  • Nebraska: 38.9%
  • North Dakota: 53.9%
  • Ohio: 28.1%
  • South Dakota: 44.5%
  • Wisconsin: 33.9%

The final calculation multiplies those two percentages, and tells you how far cropland values might drop, without government payments. And where that winds up is an indication of the agricultural value of the land.

  • Illinois: 14.1%
  • Indiana: 11.2%
  • Iowa: 18.6%
  • Kansas: 30.2%
  • Michigan: 9%
  • Minnesota: 18.1%
  • Missouri: 15.1%
  • Nebraska: 25.6%
  • North Dakota: 40.8%
  • Ohio: 12.2%
  • South Dakota: 24.7%
  • Wisconsin: 8.6%

"Clearly, it is the Great Plains and Arkansas, Louisiana and Mississippi that likely would be most impacted by a sudden elimination of government programs supporting agricultural commodities. Interestingly, states like Alabama, whose agriculture has been much more dominated by government subsidies than Kansas, would see a much smaller reduction in land values," Kastens and Dhuyvetter say. "That is because agriculture is much less important to Alabama land values than it is to Kansas land values."

If you imagine the 2007 farm bill eliminates farm program payments, causing land values to adjust to the levels just described, Kastens and Dhuyvetter said that would still not happen because of numerous other factors involved in computing land values. They contend the decline would only be two-thirds of that.

In a supplemental research report on determining land values, they say land with low government payments does not sell as low as it should, based on their formula, and conversely, land with high government payments does not sell as high as it should. That report focuses on valuing and buying farmland with non-agricultural features.

Kastens and Dhuyvetter believe other issues contributed to the skew, such as farmland that carries non-market rates of cash rent, multi-year leases that do not adjust quickly to the going cash rent rate, growing farm program payments that offset the lower true agricultural value of the land, and the fact that larger farms may create larger profits than smaller farms.

Finally, the Kansas State team looks at the average sized farm and finds that as it expands, its economy of scale allows it to purchase one-third of its increased acreage, while renting two-thirds.

When that parcel of farmland down the road goes up for auction this winter, it will sell for whatever the highest bidder is willing to offer, and that will not necessarily be what its agricultural value will be. That sale price will represent the production value, adjusted by the farm program payment potential, as well as a variety of other intrinsic factors that are sometimes hard to grasp.

Farmland will sell for what it is worth, but that worth is certainly different to different individuals, and there is a good chance it will never sell for a value related to the crops it produces.

If you operate farmland belonging to someone else, how much less cash rent would you have to pay if farm program payments were eliminated? Or if we ask the farmland owner the same question, how much less cash rent would you charge if government program payments were out of the picture?

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