Making sense of recent farmland values

I’ve had a number of conversations recently with farmers, farmland investors, bankers and others who have been trying to interpret the recent surveys of farmland prices. And I’ll have to admit, we’ve all been doing some serious head scratching. The USDA’s Land Values 2014 Summary, released in early August, shows 2013-2014 cropland values in the Corn Belt rising across the board, with Illinois, Indiana, Iowa, Missouri and Ohio all reporting increases ranging from 7.0 percent (Indiana) to 9.4 percent (Iowa).

Ordinarily, we’d all be celebrating such strong numbers, but there are several flies in this year’s ointment – starting with the fact that those figures don’t seem to reflect the reality we’re all seeing day to day in auctions and private treaty sales. A second problem is that they differ markedly from those reported by the Federal Reserve Bank of Chicago.

It’s important to note that the reports cover surveys conducted in a different time frame. The Federal Reserve Bank of Chicago uses numbers covering April 1, 2013 to April 1, 2014. The USDA survey was conducted a little later – during the first two weeks of June. If anything, it would stand to reason that the USDA figures would be weaker, because they take into account more of the time period in which corn prices weakened during the first two quarters of 2014. But the reverse is true.

Farmland isn’t an equity or a commodity. Prices on land will reflect the long term perceptions of future crop prices (income stream), but land doesn’t move in lockstep with prices on corn, soybean and other crops. It isn’t actively traded and reported by the hour on Bloomberg and the CME.

In truth, there’s little to be gained by constantly fretting over day-to-day and even year-to-year farm prices. If you look at the long-term view, this becomes crystal clear. The survey reported each year for the Federal Reserve Bank of Chicago covers the Seventh District – Illinois, Indiana, Iowa and Wisconsin. Prices for that district have risen every single year since 1987. They’ve weathered, 9-11 the credit meltdown of 2007-2008, and every conceivable kind of crop year. We’ve seen floods, droughts, bumper crops and crop disasters. And through it all, we’ve enjoyed excellent, stable returns.

So how do we apply the lessons of history to the current winds of year-to-year fluctuations in commodity prices, cash rents and other factors? By doing what farmers have always done. Keep working. Negotiate the best rents we can, grow crops, and sell them at the market, using the many tools that are available for insuring and hedging where appropriate.

For those fretting about prices slipping a bit, here’s my question: Where else are you going? If you’re not selling your farm this year, what difference does it make? If you’re an investor, you’re probably going to get lower rents on your land next year. But as a practical matter, what else would you be doing with your money? Investing it in a highly volatile stock market that lost 43% of its value in 2000-2003, only to recover and hammer investors with another 48% loss in 2007-2008?

The current disparity between the various farmland surveys will sort itself out in time, as future surveys reflect more of 2014. Meanwhile, the only thing that makes sense to me is to stay the course. If you’re going to do any portfolio management in this environment, it wouldn’t hurt to upgrade to better quality land. If you’re an investor, make sure you have a quality tenant who will farm responsibly and ensure solid productivity. (All things equal, good quality land will hold its value better than poor land.) Make sure you get good financial and legal advice to gain all the tax advantages available to you.

We can’t control the weather, commodity markets or government reports on farmland prices. What we can control is how we respond to all of those things, and history favors those who mind their business without overreacting to short-term fluctuations.