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Good time to own land

Jeff Caldwell 08/19/2011 @ 4:03pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

The farm land market in the central and eastern Corn Belt isn't a bad one to be a part of these days.

This week, specialists in Illinois and Indiana released the latest data for those 2 states' land values. The verdict: Illinois land Indiana values have shot 18% and 24% higher, respectively, in the last year. The latter increase is the largest one-year jump in that state in 34 years.

"With high crop demand and prices, the outlook for agriculture is very optimistic relative to other industries," Purdue University Extension agricultural economist Craig Dobbins says in a university report. "As long as those strong grain profit margins continue, farmland values are likely to increase."

The value increase for Indiana land ranged from 22.8% to 25.3%, according to a Purdue report. That's got land prices ranging from $4,386 to $6,521 per acre. Illinois farm land, according to the latest figures from the University of Illinois (UIUC), show that state's land running around $5,800 per acre. That's almost $1,000 higher than a year ago, according to UIUC ag economist Gary Schnitkey.



But, are land prices getting too high? Schnitkey says one measure shows that could be the case.

"A capitalized value equals all future returns discounted to the present. Higher returns increase the capitalized value. Lower interest rates lead to higher capitalized value. A simple capitalization model is used here:  capitalized value equals average cash rent divided by an interest rate. If the farmland price is above the capitalized value, then farmland is overpriced relative to its discounted returns," he says. "The switch to price being above the capitalized values suggests that farmland prices are increasing quicker than there discounted returns. The last time farmland price exceeded capitalized value by a large margin was in the early 1980s, immediately prior to the large decline in Illinois farmland prices that occurred from 1982 through 1987."

But, don't expect the market to tank like it did in the 1980s just yet, he adds. One of 2 major factors will have to change in order for land prices to slide. "Currently, the situation in 2011 is not like the 1980s. This suggests that either farmland returns have to decrease or interest rates have to increase before farmland prices fall," Schnitkey adds.

Another factor keeping land values on more solid footing than the mid-1980s: The amount of money borrowed to keep that land. Right now, Dobbins says that's the biggest reason the market will likely survive the ongoing macroeconomic troubles nationwide.

"It seems farmland is mostly held in financially strong hands and purchases are being made with modest borrowing," Dobbins says. "We may see a pause or decline in farmland values, but because there is less debt against the land, such a change should not cause financial stress like in the 1980s. Of course, it depends on the amount of actual decline."

But, if you think you may be in a situation where you may be a little over-leveraged with your financed land, Dobbins adds it doesn't hurt to know where you stand by conducting a "financial stress test" on your farm to determine what would happen if there was a larger change in land values down the road.

"In this volatile environment, farmers not only need a Plan A, but a Plan B and maybe a Plan C," Dobbins says.

   

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