Now that harvest is rapidly winding its way way to completion, many farm tenants and landowners will quickly turn their attention to cash rental rates for 2017. Cash rental rate decisions and discussions can often be challenging, especially in times of rapid commodity price changes. It is no surprise that cash rent and farmland values probably account for largest number of questions that we receive from readers and seminar participants. Continue reading →
In our last post we examined some of the trends in farmland values around the country. These trends indicated that farmland prices were likely heading lower in many regions of the country. This is likely the most true in the Corn Belt where grain prices have been under substantial pressure. The output price pressure has been met with stiff resistance in input prices creating a significant margin squeeze. One way that this squeeze may alleviate is with a reduction in fixed costs, most notably cash rents and farmland prices. Indeed, recent survey results from Iowa State indicate this process is underway. Continue reading →
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 earningsthat 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.