2012 outlook: What can we expect in farmland values and rent prices?

No revelation! Cropland values in Ohio have increased in 2011.
An OSU Extension survey conducted in December 2010 estimated the increase in value of Ohio cropland in 2011 would be 5.3-6.0 percent. This was prior to sharp run ups in commodity prices.

The Chicago Federal Reserve Bank and Purdue University both conducted surveys in July 2011 and found cropland values in Indiana had appreciated 20-22 percent from one year ago.

What’s driving?

These increases in land value are due to a number of factors.

Crop profitability prospects were positive in 2011, as they have been for the most part since 2007. This period has seen some of the most profitable years in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have turned to land.

Investors outside of agriculture have also been looking to farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase substantially in 2011.

Low interest rates and the relative scarcity of farmland being sold have also helped drive land values higher.

What’s next?

So all of this begs the question, “Where are land prices headed in 2012?”

The case is strong for land values to see continued strength in 2012 as profitability prospects are good for this upcoming crop year.

Returns to land (gross revenue minus all costs except land cost) are projected to be $150-$500/acre for Ohio corn in 2012, depending on the land production capabilities. This is assuming current prices of inputs and December 2012 futures prices less basis for corn.

Using the same set of assumptions for Ohio soybeans, returns to land are projected to be $100-400/acre. Returns to land for wheat in Ohio are projected to be $30-200/acre.

These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/programs/farmmanagement/budgets.

Producers and other investors outside of agriculture will continue to see farmland as a good investment alternative, and with strong balance sheets, many farmers will continue to be in the land buying mode.

Another view

The Income Method of Capitalization, an appraiser’s method of valuing assets, yields high land valuations based on 2012 projections for returns to land and interest rates.

For example, using a $250/acre return to land and a 4 percent capitalization rate, farmland would be valued at $6,250/acre.

Higher returns to land and/or lower interest rates would yield higher “appraised” land values using this approach.

Caution

There should be a note of caution in deriving budgets and using the income method of capitalization for valuing cropland for 2012 and beyond. Assumptions used to formulate these budgets and appraisals may change. Crop prices could fall and input costs may increase.

A few of the factors that could adversely affect crop profitability and land values in the next year include:

• E.U. and U.S. sovereign debt issues and potential economic slowdowns

• U.S. budget cuts leading to changes in farm policy and/or changes in energy policy (ethanol policy) Input price increases

Cash rents

The December 2010 OSU Extension Survey of Cropland Values and Cash Rents found that cash rents were predicted to increase 8 to 9.5 percent in 2011. Cash rental rates will see continued upward pressure as higher commodity crop prices and good prospects for profit in 2012 drive competition in local markets.

Producers who want to continue to operate on their existing rented land base will have to pay at or near the market rate for their area.

See the “Western Ohio Cropland Values and Cash Rents 2010-11” fact sheet online at: http://ohioline.osu.edu/ae-fact/pdf/11-AED-911.pdf to see data on yields and cash rents for various land classes.

Producers and landowners should also understand and attempt to quantify in some way the non-cash benefits provided by the producer to the landowner and vice versa.

To manage risk of volatile crop and input markets, producers and landowner should also consider flexible cash leases.