Where is the Land Market Headed?

Published on: 08:39AM Oct 17, 2008
Vance Ehmke

It’s kind of fun being a land owner these days. Over the past several years, land values have gone up sharply—sort of like the launching of an ICBM. But my guess is that at some point in the future, land will be worth less than it is today.

Where we’re at today is the $64,000 question.

Over the past 2 to 4 weeks, I think a lot of people have made some adjustments in how they view themselves. They don’t think they’re nearly as smart, nearly as bold or nearly as rich as they were before the world--and the grain markets--started coming apart at the seams.

But at the same time, there are other realities. When asked about the land market, a friend of mine commented that he has $300,000 in a Scott City bank that he’s getting barely 3% on. So he’s thinking about buying some land. A realtor I know made the same observation—that he’s gotten a lot of calls from people outside the area who want to get money out of stocks or banks and get into land.

In a conversation with a land banker recently, we both agreed that land prices haven’t suffered a lot because of recent financial turmoil. So what if the wheat market has dropped $l or $2 a bushel? It can come back just as fast. The land market is very slow in reacting to short term occurrences like these. Having said that, the land banker still felt he might be seeing a very slight softening in land prices.

Of greater long term consequence is what is happening to farm profitability. In a conversation recently with Mike Woolverton, K-State ag economist, he noted that the new cost of production on wheat is now $6.50/bu., while it’s over $5 on corn. In both cases, current cash prices are $l.50 lower than breakevens.

We all know that land is the residual benefactor of net farm income. That means at the end of the year, if we pay off all debts and expenses and still have money left over, we go out and buy some land. But if we get to the end of the year and have no money left over, we don’t buy any land. And looking at those breakevens, land prices will be making some adjustments—unless grain prices and profitability go back up or input costs go back down.

One of the things that bothers me, however, about current high land prices is that we farmers are very proud of the fact that our industry wide debt-to-asset ratios are so strong. But guys, this is a trap. We’re using very high asset values in computing these ratios. Farmers and bankers made the same mistake in the early ‘80s when they looked at very strong financial statements and concluded we could spend an arm and a leg on land.

Instead of looking at financial statements, we should have been looking at earnings. You service debt out of earnings, not net worth. And if you look at where we’re going with our current breakevens, there’s a head on collision in our future.

Earlier I felt the land market still had l to 2 years of up left in it before we had to confront reality. Today, I’m less certain of that. I’ll guarantee you, though, if our farm profitability turns around and starts heading for earth at terminal velocity, land will also come down.

But as far as what land is worth today, there’s a bunch of land on the market right now with quite a few auctions scheduled for the next month or so. Those sales will tell us where we are today. Farm profitability will tell us where we’ll be tomorrow.

And finally, your words of wisdom for the day come from Mike Campbell, Goodland KS: You become like those you hate.