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Have farmland values seen their top?

Corn and soybeans aren't worth as much as they were a year ago. That's got some farmers staring down the barrel of a breakeven price for corn and soybeans that may not be attainable based on current prices for the crops and the inputs it will take to raise them. And much of the expense side of the equation adding up to that necessary price comprises farmland.

Ask a lot of farmers about the prospect of lower land costs in the coming year or so and many see that as an almost laughable scenario. Land prices simply haven't fallen even though current levels make it tough to yield a profit on corn and soybean acres. In other words, $4.25 casn corn and $300/acre land rent don't mix very well.

"Ha! They should go down, but will they? I don't think so," says William Bruere, who with his family operates Bruere Farms near Prole, Iowa.

"Despite lower farm income and expectations of additional declines, farmland values surged further during the second quarter. Irrigated cropland values in the District jumped 25% from a year ago. Nonirrigated cropland values advanced 18% from the previous year, a slightly slower pace of growth than in the first quarter," says Nathan Kauffman, economist with the Federal Reserve Bank of Kansas City in a report released this week.

But, farmers say lower grain prices make up just one piece of the land price crunch. One other element lies outside the farm sector; as long as investors have reason to remain anxious about the general equities market, it's enough to keep capital streaming into land.

"Crop prices are not the only thing supporting land values, but is one of them. Cheap money in the form of low interest is another," says Farm Business Talk veteran advisor sw363535. "Federal borrowing and dumping of cash into the economy has helped the stock market values as much as grains prices.

"If land prices do not come back down with the grain prices, it is not a good omen for the rest of the economy. Some of the Value of farm land has been fear-driven...or at least lack-of-faith driven."

This movement in land comes despite widely documented lower farm incomes based on lower grain prices that Kauffman says have driven higher farm loan volume in recent months.

"Lower farm income boosted operating loan demand and hindered loan repayment rates in the second quarter. According to survey respondents, operating loan demand rose to its highest level in more than two years," he says of the Fed's most recent survey of ag lenders. "Loan repayment rates improved modestly, but bankers expected repayment rates to fall in the future with weakening farm income."

History -- not necessarily specific conditions right now -- sides with sw363535's assertion about the need for land prices to slip. Farm Business Talk senior contributor and farmland investor rswfarms says based on almost 80 years of data in Iowa, a trend of return on land investment of 4% to 6% has remained intact. It's fluctuated from as much as 15% to as little as 1%, he says, but it's always circled back to that average range for a normal corn-soybean rotation.

"Currently for Iowa cropland growing corn and soybeans, with average yields, a $14,000/acre land cost, and a corn and soybean cash price of $4.25 and $11.50, the ROI ratio is in the 3% to 3.5% range. This is on the low end of the 75-year average, so if all things stay the same for the 2013 crop year it would not surprise me to see maybe a 5% decline in values for the 2014 fiscal year to get back to the average ROI ratio of 4% to 6%," rswfarms says. "Personally, I see land leveling out for the rest of 2013, with the total 2013 appreciation rate being around the 18% to 20% rate. In 2014, with again normal yields and prices at $4.25 corn and $11.50 soybeans, a 5%

decline could be in the cards for the fiscal 2014 year. Could we see another mid-1980s farmland crash where Iowa farmland went from $5,000/acre down to $850/acre for the best 80+ CSR dirt? No, I don't see that happening and I will back up my statement by betting a 12-pack of beer."

Some ag lenders agree that the time is nigh for a downturn in land prices. In his survey, Fed economist Kauffman says while many see more of a leveling-off in land values in the near term, the number of those seeing a trend lower is growing. And, his data confirm rswfarms' idea that the slide won't amount to much if it does reach fruition.

"While most bankers expected farmland values to remain at current levels, an increasing number of respondents felt farmland values may have peaked. Compared with previous surveys, fewer bankers expected farmland values to keep rising. More bankers also expected farmland values to drop after harvest likely due, at least partially, to expectations of lower farm income," Kauffman says. "Among bankers anticipating a decline, though, a majority estimated farmland values would fall less than 10 percent during the next year. Very few bankers expected that farmland prices would drop more than 10%."

But, will this all happen? Will land values proceed to turn lower in the near future? Though the numbers indicate they should and will, farmers say they have little reason to believe they will see lower values and rents in the next year.

"I'm willing to bet that any good land for sale would bring prices right around what we've seen in the past couple of years. That is, I don't have any reason to expect a decline in value in the near future," says Farm Business Talk veteran advisor Jim Meade / Iowa City. "The county sure doesn't think so; my taxes have gone up again."

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