Blowing up the farm bubble
Many farmland investors in Indiana and surrounding Corn Belt states plan to continue buying despite some concerns that the market might not be able to sustain recent, rapid price increases, according to a Purdue University agricultural economics study.
Farmland values have risen considerably in the past decade nationwide, especially throughout the Corn Belt, including Indiana.
The most productive farmland in Indiana doubled from 2004 to 2011, increasing from an average of $3,278 per acre to $6,521.
From 2010 to 2011 alone, Indiana farmland values jumped by 22.8 percent.
"The rapid increases have led some people to speculate that the farmland market is in a bubble," says Brent Gloy, professor of agricultural economics and director of Purdue's Center for Commercial Agriculture, which conducted the survey designed to gauge attitudes, beliefs and expectations of buyers.
"Without knowing what investors really think of the market environment, we cannot adequately respond to that speculation.
This study helps us answer questions about what's driving farmland prices."
Nearly 250 farmers, farmland investors, agricultural lenders and agribusinesses responded to the survey, conducted in late February.
Nearly half of the respondents said their operation was primarily in Indiana, with most of the remaining respondents owning farmland in surrounding Corn Belt states.
Their median farmland ownership was 500 acres.
Fifty-four percent of the respondents said they believed that the farmland market is in a bubble, although farmers with larger operations and more experience were less likely to be concerned about that than those with fewer acres and less experience.
Still, 74 percent said they planned to buy additional land in the next five years.
Asked to consider an 80-acre tract of farmland with a normal production capacity of 165 bushels of corn per acre, what respondents estimated they would pay for it varied widely, with the average at $6,179 per acre.
"Some people are very positive about future values, and some have concerns," Gloy said.
"Their wide range of possible prices is consistent with the current uncertainty surrounding the ultimate value of the farm.
This variability of opinion creates the potential for large changes in farmland prices."
Sixty-five percent of the respondents felt that someone else would pay more for the farmland than what the respondents themselves felt it was worth.
Nearly all of the respondents believed that the amount of farmland for sale was less than normal or about the same as usual.
Gloy said the findings indicate that the market is "still searching for equilibrium prices" after the dramatic crop price increases over the last decade.
The limited amount of farmland for sale further complicates the situation.
Market and economic conditions will determine where farmland values go in the future, but a key driver of current farmland prices is the purchasing capacity of the people willing to pay the most for land, according to Gloy.
"Until the supply of land offered to the market increases, it is likely that the people at the upper end of the demand curve with more optimistic views of farmland value will continue to push prices higher," Gloy said.
"How long this lasts will depend upon how these individuals' expectations evolve."
Gloy will present more detailed study results July 11 at the 45th annual Top Farmer Crop Workshop in West Lafayette.
The two-and-a-half day workshop will include experts addressing a variety of economic, agronomic and technological topics, such as managing risk, increasing workforce productivity and developing an on-farm research program.
Download the full report , "Farmland Value Expectations and Influences: Evidence from the Field."