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Rocketing land prices warrant caution
New information shows the skyward trend of farmland values in the eastern Corn Belt is showing little to no signs that it's abating. Ordinarily, that would be cause to be bullish on land in the near future, right? Wrong, says one economist.
The results of Purdue University's latest survey of the Indiana Chapter of Farm Managers and Rural Appraisers shows that though it did a lot to maim that state's corn and soybean crop potential, it did little to slow the climb in farmland values in that state. Survey respondents said that state's land climbed in value by 16% in 2012, the third-largest single-year jump since the late 1970s, according to a university report.
While it's a good things for those holding land right now, it doesn't bide well for those trying to buy land and, as a result, it's not the most bullish signal for the market's future, says Purdue Extension ag economist Craig Dobbins. First, it's easy to assume the trend will keep up indefinitely, and that makes it easy for bidders to stretch their buying power to at or beyond its limits.
"Buyers need to guard against current conditions making them overly optimistic about the market's future or tempting them to borrow too much money for the investment," Dobbins says in a university report. "There are dangers associated with the continuing string of double-digit increases, and one of those is that buyers could be wrong in their expectations about the future of the market."
One way to keep ahead of the dangers of continued sharp increases in land prices, Dobbins says, is to watch your "flow." Anyone buying farmland in today's hot marketplace should be wary of cash inflow and outflow; today's crop prices -- the primary "inflow" measure -- justify paying high land prices -- the main "outflow." But, the chances of one of those factors inverting make justifying paying today's rocketing prices a tougher sell, and for good reason.
"Buyers who use borrowed funds are committing themselves to extra cash outflows over a number of years. Falling commodity prices could cause smaller cash inflow at a time the buyer needs more cash," Dobbins says.
While farmland rental rates have basically tracked the trend in overall values, there's evidence of a growing number of farmers taking steps to protect themselves from the growing downside risk. In Purdue's survey, the results of which were released Tuesday, 47% of farmers say they're using traditional cash rent agreements, while 36% -- a considerable increase over the last few years -- say they're using flexible or variable cash lease agreements so the landowner shoulders some of the cost burden in the volatile market.