Economist
February 12, 2016 7:22 am • By Gene Lucht, Missouri Farmer Today
WEST DES MOINES, Iowa — Despite the drop in farmland prices the past two years, land remains a good long-term investment, according to at least one economist.
“Farmland didn’t go up as much as farm income the last few years,” says Bruce Sherrick, professor of land economics and director of the TIAA-CREF Center for Farmland Research at the University of Illinois.
Sherrick says farmland has dropped the past two years and may continue to drop in the next year or two, but he doesn’t expect the drop to be dramatic. He offered his thoughts at the Jan. 29 Land Investment Expo sponsored by Peoples Company in Des Moines.
The numbers tell at least part of the story, Sherrick says.
The debt-to-asset ratio in agriculture is very low right now.
And he says that while farmland represents about 80 percent of farmer assets, it only represents about 57 percent of the total debt. From 1970 to 2015, farmland has had a high rate of return on investment.
With the drop in corn and soybean prices the past two years, farmland values have also dropped.
But the drop has not been as steep as it was in the 1980s, and the picture is different than it was in the 1980s, when farmland prices plummeted and the agricultural economy was plunged into a crisis.
Farmers and landowners today are less leveraged than in the 1980s. Farmers are also taking advantage of the availability of federal crop insurance to reduce their financial risk.
As a result, farmers are struggling today with low commodity prices. Rent prices are dropping, as are land prices. But he says the drop in land prices and rents should not be dramatic in the next year or two.
He says land prices will likely drop another 10 percent or so over the next two years, especially if commodity prices remain low.
And he says it is likely fertilizer prices and other input costs will drop at least a little bit. Energy costs should remain fairly low, as well.
But the long-term outlook for land and for farmers “is not as dire as it sounds.”
Paul Pittman, who runs a farmland investment company in Illinois, says he also sees farmland continuing to be a good investment.
“It’s really not (the 1980s),” Pittman says.
Farmland, he adds, does not directly follow commodity price trends. If commodities are high or low for an extended period of time, farmland values will reflect that trend, and the huge increase in farmland prices in the past decade is certainly due in part to high corn and soybean prices.
But he says, “We’re not seeing massive declines in agland values.”
One reason for that is less land is being sold today as owners wait to see if today’s trend holds.
Another might be that farmland still has been a good investment compared to many other items. And he says most farmland buyers are farmers.