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Are Higher Land Values Positive or Negative?
Average farmland values increased 1.9% (so far in 2018) to $3,140 an acre, according to the most recent USDA Land Value Summary report. Recently, John Deere indicated an upbeat forecast for sales in the year ahead, citing the need for farmers to replenish older and worn equipment. Yet, most producers don’t feel their equipment is worth more, as they struggle to make a living due to subpar prices for the commodities they produce. Most are proud of the work they’ve done to create outstanding crops, yet in the end, large crops contribute to big supply and low prices. Over the last several years, price rallies for row crops have been slow in coming, and just when it looks like prices may take off, they get clobbered. Timely weather is usually the reason. This year, row crops experienced a triple whammy at the end of May, as managed money quickly moved out of long (buy) positions, weather for crop growth was near ideal, and untimely tariff news created a bearish environment.
Are land values overpriced and likely to collapse? It’s possible and not likely. Farmland values have held up well due to high-yielding crops. One good price rally, and all thoughts of overvalued land go out the window. Another reason land values have held up so well is that there’s a percentage of farmers who’ve managed their risk (and money) well. They’ve done a good job of producing crops and marketing through forward sales and hedging. While cash flow is not necessarily great for any producer these days, those farmers that have done well are prepared to bid aggressively when land close to home becomes available. They are the buyers of land.
The question is whether or not it’s smart to chase land values at this time. History suggests that land, over time, is a desirable asset from an investment perspective, and ultimately beneficial to own. Yet, many farmers are seeing red ink despite high yields and good management practices. This would suggest that chasing high land prices now could be unfavorable. When land comes up for sale, especially close to home, it may be hard to not take the plunge. Your lender may have as much to say as anyone. Heed the advice of someone who is not as emotionally attached as you.
An optimistic viewpoint is that price volatility in the grain markets has picked up over the last year. Corn, beans, and wheat have all exceeded the previous year highs. World demand continues to grow. This is the second consecutive season in which corn usage will exceed world production. A weather hiccup could send prices another 20% or 30% higher. Consequently, land purchases now could make a lot of sense. Yet, a rough 2018 could weaken land prices, as producers and lenders choose not to chase higher values. Taking a conservative approach and biding your time now may position you well to be a buyer at that time.
In the end, are higher land values positive or negative? It likely depends on your perspective. While there are no right (or wrong) answers, the question is what you plan to do if opportunity knocks with an offer to buy.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129, or ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.