Top 10 Things You Need to Know About Farmland
Bruce Sherrick, professor of farmland economics at the University of Illinois, gives these 10 highlights every farmer should know about land.
1. Land prices are down, but they're not crashing.
Land prices in Illinois over the past year were somewhat down, but not as much as many people expected, says Sherrick. “It appears that the slight firming of commodity prices – or at least the failure to continue downward – has added a bit of strength. It is hard to find a scenario for an acceleration in decline. It’s easier to look for things that are beginning to put floors underneath the market.”
2. Most farmers are not selling land.
A few farmers have mortgaged parts of their balance sheet to make it through a decline in working capital, says Sherrick. “I don’t see any broad, major structural changes. There are stories of people who sold an 80 because they had 4,000 acres rented and needed to manage cash flow, but there is not a large influx of land to market for this reason.”
3. This is not another 1980s farm crisis.
Interest rates, which have an important effect on the balance sheets for many farms, are not 15% like they were in the 1980s, says Sherrick. Today, there are safety nets such as crop insurance. Lenders positions are not nearly as much in peril in terms of collateral. “I’m resisting any sort of sensationalism,” he says. “I don’t see that there’s a strong enough similarity to the 1980s to expect a similar pattern to emerge.”
4. Low commodity prices in 2017 won’t mean a land crash.
“We will probably see another muted response like we’ve seen so far,” says Sherrick. “If we have another year of sub-$3.50 corn because of a bumper crop, that means we grew a lot of corn. I don’t see it as the defining starting point of a land-value crash. When you and your neighbor both run out of money, that’s a harder conversation because that’s when land values begin to move a bit more. That could happen, but it is unlikely.”
5. Farmers are buying land.
There have been some outside investors and funds buying land, “but that still represents a relatively small share of the market,” says Sherrick. “In terms of acreage, it’s not a big deal. It’s still largely farmers buying land.”
6. Big data is impacting the land market.
Big data is becoming very useful in sorting out operators, says Sherrick. That means a better ability to prospect for land and accurately evaluate rental arrangements. “Better in-field agronomic management is becoming a real thing – not just a promise on the horizon,” he says. “Farmers are making really good use of agronomic and nutrient-management systems.” Companies such as AcreValue by Granular (Sherrick is on the Granular advisory board) are helping people make decisions, he says. “The idea of a Zillow for land will eventually happen.” The operation and ownership of land continues to separate, says Sherrick, and “that is a trend that won’t reverse.”
7. Government programs can affect land values.
The way CRP acres are allocated, for example, isn’t always optimal, says Sherrick. “The county I live in is incredibly flat. To find the most highly erodible, steepest slope land in the county, which is one of the conditions for making CRP bids, you end up with 2% and 4% slope parcels that are maybe not environmentally sensitive.” Meanwhile, in other parts of the country there is an excess of optimal land for CRP. For example, the lower two rows of counties in Iowa have more suitable land than most counties in Illinois, he explains. “This type of problem is real, but it is difficult to fix with competing political interests in the farm programs.”
8. Soil heath will have a growing effect on land value.
Land value will become increasingly tied to soil health, conservation compliance, best-management practices, water and nutrient interplay, and stewardship, says Sherrick. “Farmers who want to make their soil worth more by doing the right kinds of practices, who figure out how to improve soil health by managing inputs, and who do edge-of-field practices that make sense will see it pay off.” Institutional investors are already focused on these land-management issues, he says, because “they have such great headline risk. You won’t find a fund taking nearly as much environmental risk as a farmer or buying a property that has as much potential for problems.” Consistent incentives are needed going forward, he says.
9. Not all land values can be explained.
For example, why have Illinois farmland values dropped less than Iowa the past few years? “I wish there was a simple and clear answer,” says Sherrick. “Some people say there are fewer available buyers in Iowa because of anticorporate farming laws. It might be because Iowa increased more quickly during the run-up after 2006. Some of the peak-to-trough numbers are bigger in Iowa. Over the long run, I don’t think they will be wildly different. More importantly, local markets can have different local influences.”
10. Keep an eye on the next farm bill.
“Congress is going to be fully consumed with really big fights about things like the Affordable Care Act and revising certain regulatory frameworks and regimes on the financial side,” says Sherrick. “Ag is likely to get a lot less attention, so it may be hard to pass the next farm bill.” Contention among commodity groups rises when there is less time to put together coalitions in Congress, he explains. “I expect crop insurance to remain a critical component of the farm safety net, and I expect the conservation title to also be critical.”