Agriculture Online
08-04-06
With farmland values, the variables are many
Urban housing starts just one of many factors influencing farmland market
New housing start slowdowns in what are considered some of the hottest
residential real estate markets in the country -- the east and west coasts -declined in June, according to the U.S. Department of Commerce.
Does this foreshadow the softening of the real estate market nationwide, and
furthermore, does it mean anything to the Corn Belt farmland market?
Iowa State University agricultural economist and administrator of the
annual Iowa Land Values survey, Mike Duffy, says a connection does exist
between the two geographically distant markets. The connection lies in the
growing investor ownership of Midwestern farm ground. In terms of how this
connection could weigh on farmland values, Duffy says it could create a general
perception that holds the potential to lead a downturn in values.
"I think it is important to keep an eye on the urban real estate market. We have
seen more investor interest in farmland the past few years," he says. "If real
estate gets a bad reputation among investors, it could be all real estate -- not just
residential. The markets may not be directly linked, but they are psychologically
linked."
Some say improved crop production efficiency and growing yield potential is
driving farmland valuation. In other words, the ability to grow more means land is
allegedly worth more. Not so, says Duffy.
"The line of reasoning that greater efficiency leads to higher profit, which leads to
higher land values, is shaky. The greater efficiency leads to higher yields but
lower prices. So, the overall net remains the same," he says. "If you examine the
yield times the average price, there has been an increase in gross revenue for
the past 4 years. But, it isn't any higher than the gross revenues we saw back in
the mid-1990s.
"The bottom line to me is that higher yields could be a part of the increase [in
land values], but they are only a part."
A more logical approach to assessing value to farmland lies in the Corn
Suitability Rating (CSR). According to ISU Extension farm management
specialist Steve Johnson, a simple formula based on CSR can yield more
accurate figures.
"The use of CSR at around $40 to $45 per tillable acre per CSR index point is
much more recognized as an appraisal tool than just a few years ago," Johnson
says. Using this formula, farmland with a CSR of 80 would be valued from $3,200
to $3,600 per acre.
Still other factors beyond generally softening real estate markets and production
efficiency will loom large in the farmland value arena in the near future.
"I'm not sure the housing market is as large of a concern as is interest rates (both
borrowers and investors," Johnson says. "Two more important factors impacting
farmland values and cash rental rates in the next few years are the 2007 farm bill
and the impact of biofuels on crop production, crop prices, CRP land, etc."
While these factors may swing the pendulum one way or another at different
times, Duffy warns it's important not to view them as counteracting one another,
instead creating an altogether more volatile marketplace with plenty of variables
in the near future.
"There are countervailing forces and you need to be aware of the positives and
the negatives, but you can't really say one thing cancels another," Duffy says.
"Higher interest rates, uncertainty over the government programs, the ethanol
boom, non-farming recreational demand and the aging ownership [of farmland]
are just a few of the other really major factors."