Red Hot Land

February 6, 2011 04:42 AM

The farmer anxiety was palpable inside the City Limits Convention Center in Colby, Kan., where 15,500 acres was up for auction. The farmland—suitable for corn, wheat, milo, soybeans and sunflowers — was offered as a multiparcel auction of 50 individual tracts that could be combined to produce the highest aggregate bid.

Once the bidding started, it quickly ratcheted up to combinations of units totaling more than $15 million. The land eventually sold to an investment group from Connecticut for more than $20 million, or $1,356 per acre, making it one of the largest amounts of crop acres ever auctioned at one time.

Local grain producer Lon Frahm got a bid in the combinations before quickly being shut out.

"I’m used to being the big guy, and now I’m being pushed around by the bigger guys," says Frahm, who farms 20,000 acres. He says the land market is simply crazy right now. "We’ve had dryland sell for $2,200 at auction that would have gone for only $800 an acre five years ago. It’s unbelievable," he says.

Linda Niebur with real estate broker Mason & Morse Ranch Co. in nearby Burlington, Colo., says
demand is excellent for quality farmland. Her company sells land to a lot of outside investors and
people taking their money out of the stock market because they’re looking for safer investments.

Extreme Prices Hit Corn Belt.
In the Corn Belt, strong crop returns, low interest rates and a growing expectation that both might continue is setting the farmland market on fire, says Mike
Boehlje, Purdue University ag economist. He’s recently seen prices for Indiana farmland exceed $10,000 an acre in some extreme cases.

Between 2000 and 2010, the average price per acre of mediocre Indiana farmland—land capable of
producing an average corn yield of 155 bu.—rose from about $2,300 to slightly more than $4,400 this past June, Boehlje says. "Many of the land sales in the Midwest are to farmers, rather than outside investors, so it’s farmers bidding against farmers," he says.

In Iowa, the average value of an acre of farmland increased 15.9% in 2010, according to an annual survey conducted by Iowa State University Extension. Economist Mike Duffy says the statewide average land value as of Nov. 1, 2010, was $5,064 an acre, up $693 per acre from the previous year.

The survey shows a substantial increase in land values following a drop in 2009. "We need to watch the land values and be prudent, but I don’t think we need to be overly pessimistic there will be a crash in values anytime soon," Duffy says. "The rate of increase in 2010 appears high, but it is half the yearly increases in 1973, 1974 and 1975."

Global Demand Ups Land Value. Global demand for grain, brought on by higher world incomes and the increased use of crops for biofuels, is playing a major role in farmland values as high crop prices increase returns, says Purdue University ag economist Chris Hurt.

Two huge growth markets have been corn for ethanol and soybeanexports to China, Hurt says. In 2005, those markets required 16 million acres of production. By 2010 it took 41 million acres to meet those market demands, he says.

"That’s a startling 25 million-acre increase in the demand for land," Hurt says. "It represents about 10% of the U.S. crop base planted to major crops and is one of the primary contributors to surging land values on the demand side."

Crop prices also are getting an indirect boost from Federal Reserve monetary policy. Hurt says the second round of the Fed’s buying of Treasury securities through quantitative easing is conducive to creating inflation. "The act of creating more money tends to depress the value of the dollar. That generally results in stronger commodity prices, which would then push up returns to farmland and be an added stimulant to land values," he says.

Cash Rent Equation. Between 1990 and 2010, cash-rent levels per acre have increased by about 70% and crop revenues for grain operations have more than doubled, largely because of ag commodity and energy prices.

"Significant increases in commodity futures prices throughout this past fall as well as land-rate rents suggest that expectations are for cash rents to continue to increase, at least for the short term," says Nick Paulson, University of Illinois ag economist.

cashrent land

Since 1990, the average cash rent in Illinois has increased by about 70% from $100 per acre to $169 per acre in 2010, according to USDA’s Agricultural Land Values and Cash Rents Annual Summary.

Increasing cash-rent levels are a concern for farmers in Illinois and throughout the Corn Belt. Crop budgets tracked by the University of Illinois show land costs have represented 30% to 35% of total production costs for Illinois grain operations during the past six years. Despite consistent upward trends in cash-rent levels, this actually represents a decline in similar measures from the early 1990s.

What’s interesting to Paulson is who assumes more risk. In the past decade there has been a shift away from share-rental agreements to cash-rent arrangements in Illinois.

"Under a typical share-rental agreement, the farmer and the landowner share crop revenues, production costs, and the risk associated with production, input and commodity prices," he explains. "Under a cash-rent agreement, the farmer bears all production and price risk.

"While economic theory would suggest that farmers should earn a premium for taking on additional risk, lower farm returns have been linked to Illinois farms in which cash rent is a significant portion of their total acreage," Paulson adds.

The average proportion of total acres that are operated under a share-rent agreement has fallen from about 48% in 1997 to 37% in 2009. During the same time period, the proportion of total acres operated under cash-rent agreements has increased from a little more than 25% to approximately 40%, while ownership rates among grain farm operators have declined slightly from 25% to 23%.

Crop Insurance Factor. Paulson says these trends have significant implications for farm profitability and the risk exposures facing both the producer and the landowner. He links the risk-takers to greater availability and breadth of crop insurance programs.

"The increased use and effectiveness of crop insurance as a risk management tool could be one justification for producers taking on additional risk through cash-rent agreements," he says. "Cash-rent agreements relieve the landowner of many difficult decisions, including crop marketing and the timing of input purchases. Under a cash-rent agreement, the landowner can rely on the farmer to understand and manage the tasks associated with Federal commodity programs."

Cash-rent levels exhibit a benchmarking effect based on the previous crop year, which tends to slow rental rate adjustments. Operators with bigger farms tend to pay higher cash rents. "While this implies economies of scale, the difference in average cash-rent levels reported by small and large grain operations is relatively small," Paulson says.

Looking ahead at the next several months, land values should continue to remain strong, Duffy predicts. Beyond that, though, there is a fairly high degree of uncertainty about whether land values can maintain their current levels.

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