Outlook for Indiana Farmland Values and Cash Rent

Transcription

1 Outlook for Indiana Farmland Values and Cash Rent Prepared by Craig L. Dobbins Department of Agricultural Economics Purdue University August 2, 2000 Indiana land values The June 1999 Purdue Land Value Survey reported a reduction in land values for all classes of land. Given the low grain and livestock prices at the time, a decline in land values was not a surprise. However, in spite of continued low grain prices, the June 2000 Purdue Land Value Survey reported an increase in value for all land classes. Top-quality land had an estimated value of $2,715 per Figure 1. June Indiana land values acre, average quality land had an estimated value of $2,173, and poorquality land had an estimated value Indiana June Land Value of $1,630 (Figure 1). This was an 3000 increase in value of 2.7% for topquality 2500 land, 3.9% for average 2000 Top quality land and 5.4% for poor 1500 Average quality land compared to These increases more than offset last year's loss in value Poor $/A On a statewide basis, transition land (land moving out of agriculture) also increased in value (Table 1). Transition land values remain well above agricultural value, reflecting the higher value uses of this land and the strong national, state, and local nonagricultural economies. In June 2000, the average value for transition land was $6,532 per acre, 8.5% more than the value reported in While all land classes had higher values on a statewide basis, this was not the case in all areas of the state (Figure 2). The North, Northeast, Central, West Central, and Southwest regions of the state had increases for all types of land. The North, Northeast, Central, and Southwest regions reported increases between 1.9% and 9.2% (Table 1). The increases in the West Central region were lower, ranging form 0.2 % to 1.1%. In the Southeast region, a decline of 2.9% was reported for top land, but increases were reported for average and poor land. Top-quality land had the largest increase, 5.5% in the Northeast. Average and poor land had its largest increase in the Central region, 6.2% and 9.2%, respectively. Year 1

2 Table 1. Average estimated Indiana land value per acre (tillable, bare land) and percentage change by geographic area and land classes, Purdue Land Values Survey, June 1998 and 1999 Dollars per Acre June June %Change Land Corn /98-6/99 Area Class bu/a $/A $/A % North Top 156 2,588 2, % Average 125 1,925 2, % Poor 93 1,344 1, % Northeast Top 155 2,492 2, % Average 126 1,997 2, % Poor 97 1,531 1, % W. Central Top 158 2,780 2, % Average 131 2,267 2, % Poor 102 1,663 1, % Central Top 163 2,867 3, % Average 134 2,372 2, % Poor 105 1,863 2, % Southwest Top 161 2, % Average 126 1,929 1, % Poor 92 1,269 1, % Southeast Top 142 2, % Average 116 1,783 1, % Poor 88 1,338 1, % Indiana Top 157 2,643 2, % Average 128 2,092 2, % Poor 98 1,623 1, % Trans. 1 6, % It is generally believed that much of the farmland is in financially strong hands. When the price of land begins to decline, financially strong sellers may decide to wait. This limits the supply of land, maintaining the price. While the survey does not provide strong evidence that transfer numbers have declined, survey respondents indicated that some reduction in the number of transfers may be occurring. The number of farmland transfers in the six months ending in June compared to a year earlier was estimated to be down by 28 percent of the respondents (compared to 30 percent in 1999 and 20 percent in 1998). No change in the number of transfers was reported by 51 percent of the respondents (48 percent in 1998). Twenty percent of this year's respondents indicated an increase in the number of transfers. In 1999, 22 percent indicated an increase in transfers and in 1998, 34 percent indicated an increase. Compared to a year earlier, less land was thought to be on the market now by 37 percent of the respondents. More land was thought to be on the market now by 11 percent of the 1 Transition land is land movie out of agriculture. 2

3 respondents. Last year, 32 percent of the respondents indicated less land was on the market and 15 percent indicated there was more land on the market. Indiana Cash Rents Compared to the cash rent values reported in 1999, statewide estimated cash rents experienced slight increases for all land qualities. For June 2000, 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. In all cases, these cash rents were $2 per acre more than the values reported in 1999.These increases recovered the reductions reported in 1999 (Figure 3). The percentage increase in cash rent was 1.4%, 1.8% and 2.4%, respectively for top, average, and poor land. As with changes in land values, there were differences by Figure 3. Indiana cash rent per acre, $/A Indiana Cash Rent Year Top Average Poor area of the state. The North, Northeast, and Southwest regions reported the strongest percentage changes in cash rents (Figure 4). The Central and West Central region reported more modest increases, and in the case of poor land in the West Central region a reduction. The Southeast region reported a decline for top land and no change for average and poor land. These changes are in sharp contrast to last year when all regions except northern Indiana reported declines in cash rents. While the long-term corn yields associated with the various land classes continues its upward trend, the increase in cash rents resulted in an increase in the per bushel cash rent. On a state-wide basis rent per bushel of corn was $0.88 to $0.89. The highest per bushel rents are still in the West Central region, ranging from $ $0.97 per bushel. This is followed by the per bushel rents in the Central region and the North region. The lowest per bushel rents are in the Southeast at $ $0.74 per bushel. Relationship of Land Values and Cash Rents Both land values and cash rents increased from 1999 levels. On a state-wide basis, land values have increased more than cash rents. This has caused rent as a percentage of land values to decrease for most regions and land qualities (Table 2). Another way to view the relationship between the value of farmland and the income that it generates is the value/rent multiple. Compared to historical values, this multiple remains high (Figure 5). The current value of 19.4 is similar to the values that Figure 5. Value to rent multiple for average Indiana land, Value/Rent Multiple Year +2 STD +1 STD Mean -1 STD -2 STD 3

4 occurred during If one assumes a normal distribution for the rent-value percentage, there is only an percent chance that the value will be higher. This means that there is an percent chance that the value will decline. Table 2. Average estimated Indiana cash rent per acre, (tillable, bare land) 1998 and 1999 Rent as % of Rent/Acre Change Rent/bu. of Corn June Land Value Land Corn '99-' Area Class bu/a $/A $/A % $/bu. $/bu. % % North Top % Average % Poor % Northeast Top % Average % Poor % W. Central Top % Average % Poor % Central Top % Average % Poor % Southwest Top % Average % Poor % Southeast Top % Average % Poor % Indiana Top % Average % Poor %

5 Outlook The respondents to the June survey were pessimistic regarding short-term changes in land values. When asked to project December 2000 land values, the state-wide values for the three classes of land were 0.1 percent to 0.5 percent lower. Only values in the Southeast region were expected to show a noticeable increase. Land values in this area were expected to increase percent When asked about their expectations over the next five years, about 67 percent of the respondents predicted that land values would increase. The remaining 33 percent were divided between expecting a decline (11 percent) or no change (22 percent). In last year s survey, the number of respondents expecting an increase was 51 percent, and the number expecting a decline or no change was 49 percent. On average, June 2000 respondents expected an increase of five percent for the five years. In 1999, respondents expected land values for the five-year period to increase two percent, and in 1998 they were expecting a 4 percent increase. Budgets using current and projected commodity prices indicate a return to land that is less than current cash rents, signaling a decline in cash rents and land values rather than an increase. While the future short-term income picture is not rosy, many people have a longer run view of the land market. Survey respondents have been asked to make projections of the five-year average price for corn and soybeans since 1984 (Figure 6). This years projections changed little from last year. The average for the survey respondents was $2.28 per bushel for corn and $5.56 per bushel for soybeans. The estimated corn pric e was 3 less than last year's estimate. The soybean price estimate was only 1 less than last year's estimate. This is a sharp contrast to the 23 -decrease in the expected five-year average price of corn and the 77 decrease in the expected fiveyear average price of soybeans that occurred last year. Figure 6. Expected corn and soybean prices Price ($/bu.) Expected 5-Year Average Corn & Bean Prices $7.00 $5.50 $4.00 $2.50 $ Corn Year Soybeans Figure 7. Expected mortgage rates and inflation rates Other important factors associated with a land purchase include the expected farm mortgage interest rate and the rate of inflation. Expected mortgage interest rates increased this year (Figure 7). This means that the cash flow subsidy that is often required when land is purchased with borrowed money will Annual Percentage Expected 5-Year Interest and Inflation Rate Year Interest Inflation 5

6 increase or a larger down payment will be needed. Survey respondents also expected inflation to increase. If the opinions of the survey respondents are representative of other farmland market participants, what does this indicate about the future direction of cash rents and land values? To assess the potential change in cash rents and land values the budget for a corn and soybean rotation was prepared (Table 3). The crop prices used in this budget are the five-year average corn and soybean prices from the Purdue Land Value Survey. The corn yield used in this budget is the state average corn yield for average land. Soybean yields were estimated to be 37 percent of corn yields. Government payments include an estimated AMTA payment, Market Loss Assistance payment, and a payment from the Oilseed Payment Program. The AMTA payment for corn is based on a FSA yield of 105 bushel per acre and a payment rate of $0.26. This provides a payment of $23.21 for each acre of corn base. The Market Loss Assistance Program payment is assumed to also be $ This reflects the recent history of Congress in providing additional income support to farmers. While there is no legislation that requires these payments or payments at this level, nearly everyone expects these payments to continue. The Oilseed Payment Program for soybeans assumes a Table 3. Budgeted return to average land with a corn-soybean rotation using 5-year average projected prices Corn Beans Five-year average $ 2.28 $ 5.56 Yield Market revenue $ $ Government payment $ $ 6.62 Gross revenue $ $ Variable production cost $ $ $ $ rotation $ Machinery overhead $ Storage overhead $ 7.20 Operator labor $ $ Return to land $ Return after rent $ (21.70) Table 4. Budgted retun for average land with a cornsoybean rotation and Fall 2001 projected prices Corn Beans Loan Prices $ 1.93 $ 5.40 Yield Gross $ $ Government payment $ $ 6.62 $ $ Variable production cost $ $ $ $ rotation $ Machinery overhead $ Storage overhead $ 7.20 Operator labor $ $ Return to land $ Return after rent $ (47.86) 6

7 projected payment rate of $ per bushel. This payment is received on all bushels produced. Production costs are based on Purdue Extension Publication ID-166, 2000 Purdue Crop Guide. However in making these estimates, fuel costs were increased by 25 percent. Machinery and facility overhead expenses are taken for the same source. Labor expenses include a family living withdrawal of $26,055 ($45,225 of family living expenses less $19,170 in net nonfarm income reported by Illinois Farm Business Farm Management Association records in 1999) and $10,000 for hired labor. The per acre numbers assume a 1,000 acre farm. The budgeted return to land is about $90 dollars per acre, $22 less than the reported cash rent. A similar budget was prepared using estimated Fall 2001 corn and soybean prices (Table 4). In this budget, current future market prices were used to estimate a corn and soybean price for Fall The future's price for corn indicates a price close to the state average loan rate. For this budget a corn price of $1.93 per bushel was used. The price of soybeans is well below the loan rate, so the state average loan rate was used. In this situation, the return to land was $64, $48 less than current rents. Both projections indicate downward pressure on cash rent and land values, but does it mean that we will see a decline? 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. Many production cost adjustments have already been made by producers and there may be little room for further reductions in these items. Using a strategy of only variable cost reduction will require cutting variable costs by 19% under the 5-year average prices and 42% under the Fall 2001 projected prices (Table 5). Others may focus on spreading overhead machinery and la bor costs over more acres by expanding the farm. The farm business would need to spread the same machinery and labor costs over an additional 329 acres under the 5-year average prices and an additional 1,195 acres under the projected Fall 2001 prices. The difference could be reduced by obtaining better yields or better prices or both better yields and better prices. Finally it may be possible to make up this difference by doing some of each. For the 5-year average prices, this would mean that farmers will need to improve yields and prices, reduce variable costs, and expand farm size by 3%. For the projected Fall 2001 prices changes of 7% would be needed. Table 5. Change reguired to overcome budget deficit Strategy 5-year average prices Project Fall 2001 prices Reduce variable costs 19% reduction 42% reduction Reduce fixed cost (expansion 2 ) Add 329 acres Add 1195 acres Better yields or better prices 8% increase 19% increase Better yield and better prices 4% increase 9% increase Reduce costs, improve yields and prices 3% increase 7% increase As long as the expectations represented in the Table 3 budget are shared by market participants, it appears that there will be little change in cash rents or land values. What events might cause expectations to change and to cause cash rents and land values to decline? 1. Continued low prices cause market participants to revise downward their expectations about longer-term prices. 2 The initial farm size is 1,000 acres 7

8 2. A change in government agricultural policy calling for reduced levels of income support. In the two budgets presented here, direct government payments account for nearly percent of the return to land. No one expects these payments to be sharply reduced, but that may make it a good time to develop a strategy just in case there is a reduction. Using the projected Fall 2001 prices and removing the annual Market Loss Assistance payment and Oil Seed Payment program, results in a return to land of $49 per acre, $63 below the current cash rent. This result is compared to the two other scenarios in Figure 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 inpts as a result of these price increases. 6. A continued increase in world grain supplies. 7. Dry weather in Indiana resulting in a sharp increase in per bushel costs. Figure 6. Return to land and return after rent payemnt of $112 per acre for alterntive crop prices and level of government support $ per acre $100 $50 $- $(50) $(100) $90 $64 $49 5-Year Prices Fall 2001 Fall 2001+RG $(22) $(48) $(63) Return to land Return after rent 8

9 Top 1.9 Avg 6.0% Poor 5.1% Top 0.2% Avg 1.0% Poor 1.1% Top 5.5% Avg 3.3% Poor 4.2% Top 4.8% Avg 6.2% Poor 9.2% Top 2.0% Avg 2.7% Poor 4.8% Top -2.7% Avg 1.4% Poor 6.8% Figure 2. Percentage change in land values, June 1999 to June 2000, Purdue Land Value Survey 9

10 Top 0.7% Avg 2.8% Poor 3.8% Top 0.0% Avg 1.6% Poor -1.0% Top 3.9% Avg 4.0% Poor 2.5% Top 1.4% Avg 0.8% Poor 3.1% Top 3.0% Avg 3.9% Poor 2.7% Top -2.8% Avg 0.0% Poor 0.0% Figure 4. Percentage change in cash rents, June 1999 to June 2000, Purdue Land Value Survey 10