Outlook for Indiana Farmland Values and Cash Rent

Craig L. Dobbins

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The June 1999 Purdue Land Value Survey reported a decline in Indiana land values and cash rents. Given the low commodity prices at the time, finding a decline in land values and cash rents was not a surprise. However, in spite of continued low commodity prices, but with the addition of Emergency Payments from the government, the June 2000 Purdue Land Value Survey reported an increase in both Indiana land values and cash rents. Statewide land values increased 2.7% to 5.4%. Top-quality land had an estimated value of $2,715 per acre, average quality land had an estimated value of $2,173, and poor-quality land had an estimated value of $1,630.

Statewide, cash rents increased $2.00 per acre. In the June 2000 survey top-quality land was estimated to have a cash rent of $140 per acre, average land was estimated to have a cash rent of $112 per acre, and poor quality land was estimated to have a cash rent of $86 per acre. These increases were the same as the reductions reported in 1999, leaving cash rents at their 1998 level.

What accounts for the strength in these markets? There are several factors influencing the land market. The non-farm economy continues to be strong. This has resulted in a strong demand for development land. The sale price of land moving into nonagricultural uses averaged $6,532 per acre in the June 2000 survey, 2.5 to 4.0 times the agricultural value. To avoid payment of the capital gains taxes, many owners of the tracts moving into nonagricultural uses have used the provisions of the federal income tax code to make a real estate exchange rather than a sale. This has created a demand for land away from growing cities and towns. There also appears to be a decline in the amount of land being offered for sale. A reduced supply helps maintain the price. There have been increased government payments in response to low commodity prices. While these payments have not offset all the lost income associated with price declines, these payments have quickly been capitalized into land values. Finally, long-term interest rates, while increasing, still remain moderate.

Many of the factors influencing the land market also influence the cash rental market. First, increased government payments have been an important factor. While these payments initially go to tenants, the competitive nature of the land market results in at least part of these payments being bid into cash rents. A second factor has been the strong competition for farmland. Technology is allowing a single farmer to cover more acres. As a result, many farmers are trying to expand the size of their farm by renting additional acres. Another influence is longer-term price expectations. Many market participants are still expecting commodity prices over the next several years to average well above current prices. Low income or losses today are being offset by "hoped for" future returns. Finally, production cost increases have been modest, and yields for many farmers have been better than expected.

Enterprise budget projections for next year indicate downward pressure on cash rent and land values, but will a decline occur? The land market is a very competitive market in which those producers with lower costs, better production skills, or better price strategies have an advantage. As long as the factors identified above remain in place, little change in cash rents or land values is expected.

What events might result in a reduction in cash rents and land values?

1. Low prices cause farmers to revise downward their expectations about longer-term prices.
2. A change in government agricultural policy that does not provide supplemental payments or provides supplemental payments at a reduced level.
3. A continued increase in interest rates by the Federal Reserve in an effort to slow the growth rate of the economy.
4. A weakening of the general economy that reduces the development demand for land.
5. The continuation of the high petroleum and natural gas prices experienced this summer, further increases in these prices, or a sharp increase in the cost of other inputs as a result of these price increases.
6. Dry weather in Indiana resulting in a sharp increase in per bushel costs.