U.S. farmland value set to fall if crop prices remain lacklustre

CHICAGO, Ill. — U.S. farmland is overpriced and a correction is coming, say economists.

Brent Gloy, an economist with Agricultural Economic Insights, said U.S. land values were rising until a few years ago because farmers were making lots of money.

However, that isn’t the case anymore. Budgets are tight.

“Farmers for the last three or four years of this slowdown have been able to pay for their land or their equipment but not both,” he told delegates attending the 2017 DTN Ag Summit.

“My question is, how much longer can we do that?”

Gloy, who is also a visiting professor at Purdue University, said a university survey of producers shows widely varying expectations for crop prices.

One-third of farmers surveyed expect the July 2018 Chicago Board of Trade corn futures price to exceed $4.25 per bushel. Another third expect it will be below $3.50 per bu. When pushed further, most believe prices will remain at about today’s levels.

So if prices don’t rise, how are farmers going to alleviate pressure on their margins?

Last year they received some relief in the form of falling fertilizer prices. They have also cut back on equipment purchases, but that can’t go on much longer.

Gloy believes the next domino to fall will be land prices, which account for 35 percent of total expenditures on the average farm, the most of any expense category.

Farmers no longer have the financial capacity to continue subsidizing rent and land returns.

The Purdue survey from this past October found that 41 percent of farmers said they are financially worse off than they were a year ago. That is better than the 80 percent who thought that way a year ago but still a dismal picture.

Working capital in the U.S. agriculture sector has plummeted to $50 billion in 2017 from $120 billion in 2012.

“The working capital is gone,” said Gloy.

Peak Soil Indexes creates transaction-based farmland indexes, fair market values and projected values in six U.S. Midwest states as well as in Saskatchewan.

Matt Lindale, managing director with Peak Soil, said the company uses machine learning to determine fair market values based on crop prices, interest rates, net farm income, exchange rates, exports and storage and additional commodity prices and economic indicators.

The current fair market value of average farmland in Indiana is US$6,775 per acre, which is below the index price of $7,003, suggesting land is overpriced.

The projected fair market value in November 2018 is $6,400 per acre or 8.8 percent below the current index.

It is a similar outlook in Iowa, where the future fair market value is 6.1 percent lower than the current index and in Illinois where it is 4.7 percent below the index.

“That is not set in stone,” said Lindale.

He said many factors could change the outlook, including rising crop prices.

Statistics Canada calculates farmland values every June. Its last estimate for Saskatchewan was that farmland values averaged $1,243 per acre as of June 30, 2016. Its next estimate for June 2017 will be published around mid-May 2018.

Peak Soil’s Saskatchewan index shows farmland sales averaged $1,272 in June 2016, slightly higher than the Statistics Canada number. The index rose to $1,312 per acre as of June 30, 2017, and has kept climbing to $1,345 by the end of November.

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