30 SEPTEMBER / OCTOBER 2021 Indiana Farmland Cash Rents Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu AG BANKING Every year the Department of Agricultural Economics at Purdue University conducts a survey on farmland values and cash rents across Indiana. Farmland constitutes a majority of the farmer balance sheet and makes up a large portion of the equity farmers use for collateralized loans. Additionally, for those farmers who do not own farmland but instead cash rent or share rent, rental expenses represent a large expense on the income statement, affecting the cash flow of a farm. Because of this, it comes as no surprise that bankers pay close attention to the trends in the farmland markets and rental markets. The annual survey is sent to professionals such as appraisers, bankers and farm managers. Indiana saw record farmland prices in 2020. Despite what was happening in the rest of the economy, certain forces such as lower interest rates led to increased farmland prices. In 2021, June farmland averaged $9,785 per acre for top-quality farmland, $8,144 per acre for averagequality farmland, and $6,441 per acre for poor-quality farmland. This represents a roughly 8% increase yearover-year. Respondents to the survey anticipate this trend of increasing farmland values to continue, with an expected increase of 3.9% for top- and average-quality farmland. Cash rents saw similar increases. Top-quality farmland averaged $269 per acre, a 3.9% increase yearover-year. Average-quality farmland averaged $227 per acre, a 4.6% increase year-over-year. Poor-quality farmland averaged $183 per acre, a 4.6% increase yearover-year. A metric to measure the price of an asset is a priceearnings ratio. For farmland, we use cash rent as the earning potential. A higher P/E ratio indicates that an asset’s price is higher relative to its current earnings, while a lower P/E ratio indicates an asset is priced lower relative to its earning potential. Farmland’s current P/E ratio is 35.8, the highest it has been in the past 61 years. In the land value survey, respondents are asked about the 10 drivers of Indiana farmland values: • Net income • Growth in farm returns • Crop price level and outlook • Livestock price level and outlook • Current and expected interest rates • Returns on alternative investments • Outlook for U.S. exports • Inflation rate • Cash liquidity of buyer • Current U.S. agricultural policy. All 10 drivers of farmland values were indicated to be positively affecting the farmland market in 2021. Looking ahead, there are several key drivers that may change the direction of influence on the farmland market (e.g. interest rates increasing). Survey respondents, however, indicate that we will continue to see increasing farmland values in the short term. Overall, farmland and cash rents saw large increases year-over-year. This has helped add equity to farmers’ balance sheets in a time of uncertain farm income and rising government subsidies. This growth in farmland values should be seen as an encouraging sign to both bankers and farmers. HB
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