4 Concerns Worth Paying Attention to from the PAER Farmland Values Report

A Closer Look at the 2014 Purdue Agricultural Economics Farmland Real Estate Values

There is a common thread to anyone who has an interest buying and selling farms in Indiana. From the farmer that lives down the road, concerned about his own operations, to the real estate investor who looks at buying farmland as an alternative to stocks – the question on everyone’s mind is “What is my farm worth?”

The answer to this question is never easy.  With grain prices in continual flux, input costs on the rise, the recent boom in the price of farmland, and the seemingly universal agreement that interest rates will only go up from today’s rates – the perceived value of farmland real estate is ever changing. From the expectations of the buyer and seller to the financial and emotional considerations that occur in every real estate transaction,

the old adage remains true – the farmland real estate market is local in nature and should not ignore the fundamentals.

Brief History of the PAER Annual Report

Since 1960, Ag Economists from Purdue University have studied the trends and gathered data from around the state of Indiana on farmland prices, cash rents and outside factors affecting the agriculture industry as a whole. Long story short, the PAER report is part survey, part economic analysis and one hundred percent valuable to agricultural professionals and farmers. In early August, the Purdue University team released their annual report and below are four key considerations that you should keep an eye on.

1. The Production Value of Farmland is Related to Market Value

Soil is the biggest asset that farmers have. Healthy, quality soils net great yields, as such top quality land, most notably in the West Central Indiana region, command the highest land values in the state averaging $12,108 per acre. According to the 2014 PAER report, low quality or lower yielding soil types in every region have much lower values per acre. Soils in the the Southeast range as low as $3,350 per acre.

There is some misconception in the real estate market that all farmland is created equal, but this really is not the case.

2. Lower Crop Returns x Higher Taxes = ?

According to Larry DeBoer, Professor of Ag Economics at Purdue, property taxes on agricultural land have risen 33% since 2007. With no easy answer on how to reduce the tax burden, farmland owners should pay special attention to the base rate per acre in upcoming years. How high might it go?

3. Outside Factors Influence Farmland Values

Location. Location. Location. Farmland in the “donut” that surrounds growing urban development commands a price per acre that may influence the perceived value of other farmland in the area. Known as progression, low quality farmland in close proximity to higher valued real estate experiences greater values. Farm real estate in areas that are prime for subdivisions and commercial retail development continually push the boundaries of the growing farmland values in Indiana. Other factors that economists cite as influencing these values include growth of the biofuels industry and the opportunity for increased exports of grains.

4. Don’t Ignore the Fundamental Costs of Agricultural Production

Input costs vary from operation to operation, but the basics always hold true – the cost of production,  should not exceed the value per bushel. For those that operate with the majority of their crop in the upper limits of cash rented farmland, this is where rolling the dice may have the most risk.

Conclusion

With more and more agriculture news sources reporting lower farmland values in the corn belt during the first quarter of 2014, it’s safe to say that we may be at an influction point. In terms of both cash rents and the price per acre of Indiana farmland, the expectation of farmland value and the fundamental principles that guide agriculture production seem to be out of sync.

Craig Dobbins, the very notable Agricultural Economist at Purdue University, told us in an interview that “the cost of production has been ratcheted up so high that farming operations need to seriously evaluate how they can lower the cost of production.”

We ask our clients and colleagues regularly about production value and its relationship to farmland value and do our best to get back to the basics.

 How does your investment in better soil health today affect the value of that land tomorrow?

Highly regarded Ag Economist Brent Gloy of Purdue University answered us via Twitter by saying “those kinds of investments have usually been a good bet.”

Will the best time to buy agriculture farmland in Indiana be later this year or the spring of 2015 when expectations of value are put in check with the reality of corn and soybean prices?

About the Author

Johnny Klemme is a published author, graduate of Purdue University and Land Broker specializing in farms, recreational property and development land in West Central Indiana. Born and raised on a local farm, his commentary on issues that are important to the farming and real estate community can be found at www.PrairieFarmland.com/blog