As commodity prices continue to plummet, farmers and landowners are becoming worried about just how much their farms are worth. But the downturn in crop prices doesn’t necessarily mean a big drop in land prices.
Prior to 2006, a high price on corn would be above three dollars per bushel. Since that time, the price of corn has topped eight dollars, and the value of an American farm producing that corn has also grown dramatically.
At last week’s Farm Progress Show in Boone, Iowa State University had experts on hand to field questions. ISU Ag Economist Chad Hart was one such expert, and he says the direction land prices are now headed with falling commodity prices was one such question.
“What tends to happen here, if you think about it: land values follow the incomes that are derived from the land. And so, in this case, crop prices are a good mimic for that. But what tends to happen, is that crop prices move about a year or two before the land values move.”
Crop prices began to increase around 2006, but land values didn’t began to respond until around 2008. The last three calendar years have seen record high commodity prices, which were met with record high land values.
“Now ’14 prices have dropped. The question is: how long does it take before land values start to follow back down, like they followed up?” He says, “And the question is open, because it does take some time. We’ll see it probably first in land sales; we’ll see it next in cash rents as we go forward.”
But should producers and landowners still be worried about the possibility of a yet unseen price cliff looming just out of sight.
Hart says, “No. My argument would be no. When you worry about a cliff; let’s go back to the 1980s. What created that cliff we fell off that created the ’80s farm crisis? That was having a lot of debt and having a lot of land that had to be sold to meet that debt.”
Hart says farm balance sheets, and incomes, indicate there’s not much debt on the farm at present, meaning land sales to cover debt are unlikely, and so is any kind of collapse in land values.