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Commodity Prices, Land Values, and Cash Rent Predictions

Don’t expect higher commodity prices this fall, according to a survey of Iowa farm managers, rural appraisers, real estate brokers, ag lenders, and Extension specialists who attended the Soil Management and Land Valuation Conference at Iowa State University in Ames, Iowa, on May 18.
By November 2016, corn prices will be $3.75 per bushel and soybeans $9.44, according to 191 people who completed the Estimated Land and Commodity Prices predictions. (More than 280 attended the conference.)
The attendees predict that Iowa land values will average $7,776 per acre in November 2016. (Last year’s attendees predicted Iowa land values for November 2015 at $8,178.)
A panel discussion by agricultural lenders and farm managers concluded that downward pressure on cash rents in Iowa will continue into 2017. Factors causing this drop include:

  1. Low crop prices
  2. Financially stressed producers
  3. Tighter lending conditions
  4. Lower land values

“Recent prices are likely to be the norm for the foreseeable future, barring the unexpected,” says Jim Knuth, senior vice president, Farm Credit Services of America.
Producers can make the most difference in lowering their breakeven by making fixed costs adjustments in these areas, says Knuth:

  1. Owned acres
  2. Rented acres
  3. Machinery / equipment
  4. Family living 

Cash rents move in the same direction as land values, says Mike Downey, Hertz Farm Management. Both are connected to commodity prices, production costs, and net profit, but cash rents tend to lag behind in relation with farm revenue. Why? Producers are hesitant to give up rented land for fear they will never get it back, says Downey. Also, some producers have been willing to subsidize rented land with cash reserves. “That can’t continue,” he says.
Knuth points out that this down cycle in the ag economy is not a return to the 1980s Farm Crisis. That was a leverage crisis driven by high real estate prices, high levels of debt relative to asset values, high interest rates, and variable-rate loans. The current challenge is a cash flow shortage driven primarily by high cash rent, machinery and equipment investments, and living expenses, says Knuth.

The 89th annual Soil Management and Land Valuation Conference is the longest running conference at Iowa State University.

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