Will farmland in our region follow commodity prices lower?
By: Dennis Badger, Vice President Collateral Risk Management | Farm Credit Mid-America
After nearly a decade of following commodity prices up, farmland values throughout the Midwest have started to decline in response to lower grain prices. Not surprisingly, the biggest declines in land values have occurred as a correction in Corn Belt states where the biggest gains in land values previously occurred. How has our four-state area of Indiana, Ohio, Kentucky and Tennessee compared? To find out, Farm Credit Mid-America appraisers researched and analyzed 4,000 land sales in 2015 and compared them to over 100,000 land sales in our proprietary historical database.
Agricultural property values have declined significantly in Midwestern corn and soybean states. In Iowa, farmland prices fell an average of 15 percent over 2014-15, so we expected that farmland values in Indiana would be hit hard, too. But, the decline in Indiana was less than three percent from 2014-15. Ohio, Kentucky and Tennessee actually increased slightly in that period. We believe income diversification and less reliance on commodity prices have helped moderate land values in our area.
Though retail non-ag sales have provided some protection for land values, commodities are still a factor, and land prices could still face pressure in the future due to general economic uncertainty, rising interest rates and other factors. Moreover, a general trend in farmland price declines in the Corn Belt may eventually affect land values here.
In our four-state area, we don’t expect a rapid rebound in commodity prices or land values anytime in the next few years, so farm incomes and balance sheets could be pressured. There will likely be fewer land buyers, which means increased marketing time for listed properties with stable-to-declining farmland property values. Land owners who don’t need to sell are likely to hold onto land, resulting in a decreased number of properties on the market.
Cash rents may need to be negotiated if commodity prices stay low, so landlords and farmers may want to consider a flexible farm lease agreement tied to gross farm income. Some owners and tenants use flexible lease agreements where the rent is not determined until after the crop is harvested. The final rental rate is based on actual prices and/or yields attained each year.
Many farmers have taken advantage of strong incomes and reduced debt levels over the past few years, but USDA projections for 2016 indicate slightly higher debt compared to last year. An increase in operating loans and declining land values may create more risk with higher debt-to-asset levels in the future. Now is the time for farmers to watch their balance sheets closely and maintain a cautious approach in pursuing any land purchase or rental opportunities. Treat land as a capital purchase – if it doesn't make financial sense on the bottom line and won’t make a profit in the next five to 10 years at expected commodity price levels, then consider holding off on the purchase.
A focus on production efficiency, cost reduction and flexible lease negotiations is more advisable than expansion right now. Rather than buying more land, a safer investment might be adding improvements such as tile drainage or irrigation to your current land. Quality land holds its value better than marginal land, and improvements that enhance yield and income potential also help.
Farm Credit is committed to being a reliable source of credit for customers in any economy. We encourage you to always make borrowing and buying decisions based not only on opportunities but also business need. For more commentary and perspective on trends affecting ag finance, visit the Farm Credit Mid-America website.