A Purdue agricultural economist expects Indiana farmland values to keep rising this year, continuing a trend that has seen them increase by 270 percent since 1985.
Farmland increased in value by 12 percent last year. In June 2010, the average price for an acre of land in Indiana was $4,419. With the strong prices we have seen since last fall, Craig Dobbins expects that number to increase significantly in the survey that is being conducted now.
"When you buy a capital asset, you are buying future income," said Dobbins, who explained that the three main factors driving farmland value are income, interest rates and the growth rate of annual income.
Income has a positive relationship to farmland value. Farm income -- what is left after subtracting all costs except land from the overall revenue -- has increased greatly with the strong commodity prices.
While commodity prices have increased with ethanol production, rising farm input costs need to be watched and have cut into farms' total income, Dobbins said.
"In 2009, petroleum costs went way up and fertilizer costs hit $1,000 per ton, which was higher than we ever imagined," he said.
"This squeezed crop production margins. Farmland values didn't increase as much and in some cases small declines occurred."
Interest rates also help to drive farmland value because low interest rates make it easier to pay for a capital asset like land and make alternative investments less attractive.
"This is one area that a lot of people are talking about, as interest rates peaked in the 1980s and have been coming down ever since," Dobbins said. "That's helped increase farmland value, but zero is the bottom on interest rates, so it's likely that they will at least flatten out."
Dobbins said that with a growing world population and increased demand, many expect the growth rate of annual income to continue to be strong. Better crop genetics, tillage systems and weed control have led to increased yields and increased income.
Many other factors influence farmland prices, such as location and potential development. But, with the greatly decreased housing market of recent years, Dobbins said the movement of farmland into residential developments has slowed dramatically.
Far more people are interested in buying farmland than selling it, Dobbins said. Although it appears likely that farmland values will continue to increase, he advised farmers to be cautious with all purchase and sales decisions.
"Current farmland values are not excessive, but this is all based on the idea that expectations of strong farmland income, low interest rates, and a continued growth in farmland income will be realized," Dobbins said. "Sometimes expectations, even widely held expectations, are not realized. When this happens, there can be significant downward adjustments in farmland values. Farmers need to carefully budget through any decision to buy land."
For additional information on farmland values, view the paper and video materials developed by the Purdue Center for Commerical Agriculture at http://www.agecon.purdue.edu/commercialag/progevents/landvalueswebinar.html