We’re within striking distance of the end of the 2007 farming season, once harvest is complete and some fall tillage accomplished. Then it will be time for the old game of musical farms, as some farmland changes hands and some tenants change farms. That will indicate the impact that commodity prices have on land values and cash rents, but a good indication has already documented by Purdue University economists. Buckle your seatbelt.

The annual Purdue survey of land prices and rents was taken in June, and the focus quickly shifted from whether farmland was reaching a top to how high will land prices really go. That’s the assessment of Craig Dobbins and Kim Cook who said all land values in the state increased. While their detailed report on land values and cash rents contains statistics that are more parochial for Indiana, it contains many trends that will broadly apply at least across the Cornbelt, as well as in many other sections of the US.

Interestingly, the Dobbins survey asked for a land value based on long term corn yields and found, “The most expensive land is the poor quality land with a value of $26.80 per bushel. Top quality land was the least expensive at $25.15 per bushel.” Farmland everywhere is moving out of production, and the Purdue pair said the value of transitional land is anywhere from two to ten times its agricultural value, with an average over $95 hundred per acre. Recreational land values ranged from $975 to $10,000 per acre with the median value at $3,500.

As a result of the higher land values, cash rents also went up, and Dobbins and Cook say, “This was an increase in rental rates of 10% for poor quality land, 9.4% for average quality land, and 10.3% for top quality land. Again, this is the largest annual increase in cash rent since 1977. State-wide, rent per bushel of estimated corn yield ranged from $0.97 to $0.99 per bushel.”

Are the higher prices for farmland drawing more onto the market? The Purdue survey found that only 16% of the respondents thought there was more land on the market than in 2006, with the balance believing the land on the market was the same or less than last year. And who is buying it? The survey respondents said over 75% of the demand was from farmers, substantially reversing a 3 year trend of declining interest by farmers. While farmer interest in farmland has increased, non-farm investor interest has apparently decreased which the economists attributed to higher interest rates and better stock market returns. The survey found a strong interest in the demand for rural homes, with 56% of the respondents saying the demand had increased.

The reason for buying land is to capture the premium prices of corn and soybeans say respondents to the Purdue survey. They were asked to predict the average prices for the next five years, and said corn would average $3.43 per bushel and beans would average $7.31 per bushel. Another reason for buying land is the moderation of interest rates. The survey respondents did not expect much change from the current average of 7.6%, which is well below long term rates in the past decade.

Despite the moderate interest rates, they were the only factors among 11 dynamic forces that were seen as negatives to farmland values. Crop prices were the greatest positive forces, followed by net farm income, growth in returns to farmland, supply of available farmland and cash liquidity of buyers. The economists said the increase in commodity values and its impact on land values has created increased uncertainty about the future of land values. Only 8% of respondents thought values would decline. Of the 92% believing values will remain the same or increase, the average expected increase in land values exceeded 13%.

But what could soften the demand for land and weaken land values? The Purdue economists said there are several potential pitfalls:
• Large increases in production costs
• Higher long term interest rates
• Increased risk of ownership as related to US farm policy
• Sharp decline in crop prices
• Decline in oil prices that would affect biofuel prices.
• Continued weakness in the housing market
• A combination of the above factors

Summary:
With little doubt the winter will bring more land sales at higher prices and higher cash rents demanded by land owners. Whether the information comes from Indiana or any other Cornbelt state, the likelihood of increases will exist. Farmers will be buying more land than non-farm investors, and both transitional land around metropolitan areas and recreational lands will maintain strong to higher values. Tuesday’s lowering of interest rates would be seen as a strong force to continue the momentum.