28 SEPTEMBER / OCTOBER 2019 AG BANKING Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu Indiana Farmland Values The $60 billion question According to the most recent projections from the U.S. Department of Agriculture, farm real estate accounts for over 83% of the total value of U.S. farm sector assets. In Indiana alone, the USDA estimates the value of farmland in the state at $60 billion. Farmland serves as the primary store of farmers’ wealth and an important source of collateral. As a result, the price of farmland is generally seen as the keystone of the financial health of the agricultural sector and, to most lenders, one of the key indicators to follow. To recap recent dynamics of the farmland market, farmland prices across much of the Corn Belt appreciated rapidly from the early 2000s through 2014, then retreated moderately. Most recently, farmland prices throughout the region appear to have plateaued. There is much debate about where farmland prices are headed over the next couple of years. Farmland prices, in aggregate, are determined by buyer and seller expectations of current income, future income growth and the cost of capital to acquire the asset. In this article, we analyze each of these three components of farmland prices to gain insight into where farmland values may go in the future. Earlier this spring, USDA income forecasts predicted a 10% increase in net farm income levels in 2019. A combination, however, of poor weather conditions that delayed planting and continued uncertainty in key trade relationships may likely further suppress farm incomes in 2019. These factors, along with high-ending stocks of corn and soybeans, have kept income expectations low through the end of 2019. Lower returns place downward pressure on farmland prices in the nearterm. Potential farmland buyers point toward future income growth as a way to justify higher farmland prices. These optimists often stress the increasing global demand for calories and protein supplied by agricultural commodities. The global demand is driven by changes in both population and wealth, with more pronounced shifts in consumption occurring in developing and transitional economies. In addition, many market participants believe that emerging technological developments in the agriculture sector may drastically reduce production costs, increase yields and change consumer information. These changes, they argue, would increase the growth rate of agricultural incomes and support higher farmland prices in the near or distant future. While the Federal Reserve has increased the cost of short-term borrowing (federal funds rate) modestly in recent years, longer-term rates, such as the 10-year Treasury, have continued to decline. Falling longer-term interest rates place upward pressure on farmland prices in the near-term, as the cost of borrowing declines. At present, there appears to be some political pressure to decrease the federal funds rate in the near future. There is, however, a limited relationship between short-term rates and farm mortgage rates. Thus, changes in short-term rates are unlikely to drastically impact farmland prices. During the farmland price boom of the previous decade, many observers warned of an imminent decline in farmland prices like that of the 1980s farm financial crisis. The modern agricultural sector, however, differs in several important ways from previous cycles. Changes in agricultural lending practices and risk mitigation provided by the federal crop insurance program have limited the potential for farmland prices (or farmers) to overreact to short-run disturbances in Todd Kuethe, Ph.D. Associate Professor, Schrader Chair of Farmland Economics Purdue University tkuethe@purdue.edu
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