Outlook for the upcoming year’s crop input, farmland value and cash rent

Cropland values in Ohio have increased again in 2013. Data from the Ohio Ag Statistics Service shows an increase of 12 percent for bare cropland in Ohio for 2013.

According to their data, bare cropland averages $5600/acre, up from $5000/acre the previous year.

The Ohio Cropland Values and Cash Rents Survey (AEDE) conducted in January 2013 shows the increase in value of western Ohio cropland in 2013 would be 6.8 percent to 15.4 percent depending on region and land class.

The Chicago Federal Reserve Bank and Purdue University both conducted land value surveys in 2013. The Chicago Fed survey (October 1) of bankers found Indiana land values of “good” farmland increased by 18 percent year-over-year (the entire 7th Fed District increased 14 percent) while Purdue (June 30) found the Indiana statewide annual increase in cropland values ranged from 14.7 to 19.1 percent depending on the productivity of the farmland.

Profitability

Crop profitability prospects were positive in 2013 as they have been for the most part since 2007. Profit margins in 2013 are projected to be positive as high yields should compensate for lower prices in most regions of Ohio.

This past seven-year period has been one of the most profitable periods 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 chosen to invest in land. Investors outside of agriculture have also been actively seeking farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase again substantially in 2013. Crop profitability, along with low interest rates have been the primary drivers of this run-up in cropland values. The relative scarcity of farmland has been a contributing factor in increasing cropland values.

Question

So all of this begs the question, “Where are land prices headed in 2014?” The key factors — crop profitability and interest rates — both show indications of “unfriendly” moves in 2014. Crop profits are projected to be lower (possibly negative) and interest rates have moved higher since last year. Does this mean land values will decline?

The projected numbers for 2014 point towards flat to lower cropland values for 2014. Projected budgets for Ohio’s primary crops for 2014 show the potential for little to no profits (possibly losses). The Federal Reserve has indicated that it plans to maintain current low interest rates through mid-2015 although mortgage rates have moved higher.

Projections

Returns to Land (gross revenue minus all costs except land cost) are projected to be $12-$213/acre for Ohio corn in 2014, depending on the land production capabilities. Budget projections for 2014 soybeans show returns to land to be $62-$248. Wheat budget projections for 2014 find returns to land to be between $25 and $159 per acre. This is assuming current prices of inputs and present December, November and September 2014 futures prices, respectively.

These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/research/osu-farm-management/enterprise-budgets.

The Income Method of Capitalization, an appraiser’s method of valuing assets, yields flat to lower land valuations based on 2014 projections for returns to land and interest rates.

For example, using a $213/acre return to land (the high yield scenario of the projected corn return to land for 2014) and a 4 percent capitalization rate, farmland would be appraised (valued) at $5325/acre.

Using the return to land of the high yield scenario for 2014 soybeans ($248) yields an appraised value for land of $6200.

These are only examples and are not meant to reflect the land value for your area. Lower “returns to land and/or higher interest rates would yield lower “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 2014 and beyond. Assumptions used to formulate these budgets and appraisals may change. Profit margins may change from what we are presently projecting. Interest rates, currently at low levels, may increase further.

One factor that may support land values heading into 2014 is the financial strength in the sector. Crop farmer balance sheets have generally improved during this past seven year period. Financial health in the sector may counter-balance the effects of lower profits and potentially higher interest rates to underpin land values. Which of these opposing set of forces is the strongest will determine which direction land values head in 2014.

Cash rental rates will move based on where they are in relation to the current market. Rents at the low end of the market may have some upside potential yet as they catch up to the current market.

Rents at the high end of the market will be sticky as operators may be reluctant to ask for relief after one year of low prices for fear of losing part of their land base.

Flex leases will likely decline due to lower crop prices. Producers that want to continue to operate their existing rented land base will have to pay at or near the market rate for their area.

The “Western Ohio Cropland Values and Cash Rents 2012-13” online Factsheet has data on yields and cash rents for various land classes.

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

About the Author

(Barry Ward is the leader of production business management in the Ohio State University Extension’s department of agricultural, environmental and development economics.) More Stories by Barry Ward

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