A survey indicating that farmland values are expected to continue increasing is good news for landowners but could also signal concern for buyers, an agricultural economist says.
"There are far more buyers than sellers," said Craig Dobbins, Purdue Extension agricultural economist. "People in the market to buy farmland have a very optimistic outlook about the future, and they are willing to pay unthinkable prices."
According to the survey of 32 farm managers and rural appraisers from 25 Indiana counties, the average estimated price of farmland was $7,533 per acre, and all of the respondents indicated their estimated price was higher than the value in February 2011.
While the increases are good news for landowners, Dobbins said there are dangers associated with paying exceptionally high prices to own farmland.
"One of the dangers is that buyers' expectations about the future of the market could be wrong," he said. "If land values or commodity prices decrease, that can really change profit margins. And it doesn't have to be a drastic decrease." More severe problems can occur if buyers borrow a substantial amount of money to finance land purchases.
"Buyers need to be careful because farm debt levels will affect how hard the fall could be if commodity or farmland values decrease," Dobbins said.
With the strong market, rental prices for farmland also have been on the rise. Survey respondents indicated the average 2012 cash rent was $253 per acre. A majority reported that rate was higher than it was in 2011, and only two reported their rental rates to have stayed the same. None had decreased.
According to Dobbins, the increasing cash rents have led some landlords and tenants to get creative in lease agreements. While 42 percent of respondents said lease agreements were traditional fixed cash, others were using flexible lease agreements and crop share leases.
"Longer term, there is less certainty in how farmland values will change,” Dobbins said. “Most respondents expect farmland values to be steady or higher, but sound risk management suggests that buyers need to explore the effect of a 15-20 percent decline in farmland values on the business."
The survey was conducted Feb. 15 at the winter meeting of the Indiana Chapter of Farm Managers and Rural Appraisers.
Source: Purdue University