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Think of land price as bushels of corn, MU economist says

University of Missouri Extension | Updated: 05/17/2012

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COLUMBIA, Mo. – To help farmers decide how much debt farmland can support, Joe Horner asks them to calculate payments not in dollars but in bushels of corn. That may surprise some on how cheap land has become.

Horner led those at the 2012 Breimyer Seminar through his way of thinking about how much mortgage payment a farm can absorb.

The University of Missouri seminar on land prices reminded Horner of his days in a county extension office.

“Impossible-to-answer questions came in the front door,” he recalls. “What’s a farm worth?”

Now Horner is an agricultural economist with MU Extension in Columbia. He tackles those questions as if he were working across the kitchen table with a farmer.

Land-price questions require individual decisions, he says. Not all land is created equal. The same answer won’t fit everyone.

Every speaker at the seminar recalled the land-price boom of the 1970s—and the land-price bust of the 1980s. Horner doesn’t see much similarity in recent rapid increases in land prices.

He showed the changing value in the Missouri corn and soybean crop. In 1970, the combined corn-soybean value was $500 million. In 2011, combined value shot up to $4.5 billion.

“A whole lot more money popped up out in rural Missouri just in the last five years,” he says. “You see a lot of new grain bins, bigger tractors and more combines. But you can only buy so much new equipment.”

Land becomes an asset for investment, but he noted that there’s not much land changing hands. When land becomes available, several bidders are waiting. Expect prices to increase.

“When reading news of high land prices, just remember, we are not Iowa,” he says.

Horner notes that farmers’ debt-to-asset ratios have dropped steadily since the farm crisis of the 1980s. Now, most farmers are on solid financial footing, unlike in the land rush of the 1970s.

“It’s hard to accumulate debt when assets are piling up,” Horner says.

On average, debt accounts for about 13 percent of farm assets today. In 1977, debts accounted for 20 percent of farm assets.

Land does represent the biggest share of farm debt, however. The land debt runs about 55 percent of all farm debt, according to recent reports.

The answer to how much debt farmland will support varies from farm to farm. Land on hills may be better suited for grass for cows, while river bottoms are best for corn and soybeans. Cash flow will be different for each farm.