It might not happen in 2014, but during the next three years farmland values and cash rents are likely to head lower.
"Take 10% to 15% off cash rents and 15% to 25% off land values for the next three years," says Michael Langemeier, a Purdue University ag economist. If cash rents decline, as he expects, "land values will fall faster and harder, simply because land prices went up at a faster rate." His forecast applies to Indiana.
Land values increased 10% per year, from 2000 to 2013. "That’s unprecedented. You have to go a long time—if you could find it—when land prices went up this fast and this rapidly," Langemeier says. Values from 2000 to 2013 more than quadrupled, from $2,000 to $9,000 per acre, and ratcheted up rapidly the past three years. They more than doubled from 2007 alone, when values were $4,000 per acre.
Cash rents increased 6% per year from 2000-13, with the rapid increase beginning in 2007. "No coincidence there," Langemeier says. "That’s when we saw the spike in crop prices."
For average land with 170 bu. corn yields, cash rent in 2007 was $160, and in 2013 was $283 per acre. "That’s a big adjustment," he says, "and lower rents will not happen instantaneously."
What would it take to drive them lower? Three years of $4.50 corn, which Purdue’s projections show likely. In 2014, cash rents are more likely to stabilize than decline, he adds.
While averages are important, Langemeier says that it’s important to keep in mind the wide range in both cash rents and land values. A band of $7,000 to $11,000 exists on land values, he notes. Presently, the land value to cash rent multiple or ratio is 30, while the long run multiple going back to 1960 is less than 20.
"With returns expected to be down and long-term interest rates likely to be higher, we probably will see a correction in the land price to cash rent multiple," he says.
Behind Langemeier’s predictions on land values and returns is reduced margin per acre, particularly for corn. From 2013 to 2014, he forecasts that the contribution to margin for continuous corn will decline 48.7%; fall 44.3% for rotation corn, down 13.8% for rotation soybeans, with wheat off 29.7%.
For 2014, rotation soybeans show a contribution to margin of $371 compared to $269 per acre for rotation corn. The gap is even wider for continuous corn, with a $206/a margin predicted for 2014. This is a sharp reversal from 2008-12, when rotation corn showed a $377 versus $352 advantage over soybeans.
For this year, corn held a $483 versus $431 edge. For 2014, even if you back down soybean yields, there is still a $50 advantage for soybeans over corn, he says. "We’re not expecting as large a crop in soybean prices versus corn," Langemeier adds. Because of that, he expects a shift to more soybean acres at the expense of corn.
Contribution to margin includes variable costs. Not included are overhead costs, specifically machinery costs, hired and operator labor, and the really big one, cash rent or the opportunity cost on land.