Brent A. Gloy
Farmland values are highly dependent on expectations of the future earnings that a farm will generate. As commodity prices have fallen there has been considerable speculation about what will happen to farmland values. It is important to remember that it is not just current commodity prices that are important, but the earnings that will be received over many years in the future. In a previous post we examined the USDA Baseline corn price projections. In this post we will use that information to look at a hypothetical valuation of high quality Indiana farmland.
The approach is to use the USDA baseline projection of prices, the variable costs, and yield trends to construct a measure of return over variable costs. Then, we calculate farmland values under various assumptions about the amount of the return over variable costs that flow to farmland. These amounts are then converted to farmland values with various capitalization rates.
Specifically, we will look at the 1) USDA Ten-Year Baseline Forecasts, 2) Implications for Returns to High Quality Indiana Farmland, and 3) How Expected Returns Translate into Farmland Values.