Higher Farmland Prices Help Balance Sheets, Loans and Estates, but Hurts Profits

Implications: The biofuels boom is driving up prices for farmland across the US.  Typical prices for top farmland selling with no development potential, are now around $6,000 per acre or more in Central IL.  The higher prices are good for current owners, but bad for anyone renting land, which covers the vast majority of agricultural producers, at least in IL, where over 70% of land is owned by someone other than the operator.  Cash rents for farmland have nearly doubled during this escalation in prices, cutting out a large chunk of the expanded profits, and passing it into the hands of the farmland owners.  These higher prices and rents are creating a great deal of additional risk, as high commodity prices and average and above yields are being factored into budgets to allow them to cover the cost of higher rents.

Analysis:

Prices for farmland in the US Midwest are skyrocketing, largely due to the higher returns per acre, which is driven by higher commodity prices, which are a factor of the biofuels driven boom. 

 

Higher prices for farmland are great if you already own it, and are even better if you happen to be getting ready to sell it.  Anyone cashing in an estate, or just seeking to cash in, is smiling from ear to ear.

 

Prices for top-quality farmland in my part of the state of IL is running near $6,000 per acre, which is probably 30-40% higher than it was just two years ago, in the time before ethanol turned the agricultural world on its ear. 

 

Eighty acres, 1/2 mile from my farm near Assumption IL, sold a couple of weeks ago at auction for $5,400 per acre.  The farm has a ditch that cuts it into two pieces, and eighteen months ago, you would have been hard pressed to find a buyer willing to offer much over $4,000 per acre.

 

Obviously higher prices make it more difficult for anyone seeking to purchase farmland....and more risky as well.  Assuming that this current spike is driven in large part by biofuels, what happens to the market if that demand falls off?  Unlikely scenario?  Perhaps...but ethanol profitability has already fallen dramatically, so it seems likely that expected future expansion in demand may not reach expectations.  In addition...what happens to commodity prices if and when cellulosic ethanol becomes a reality?

 

Rents for farmland are also being affected by higher prices for farmland, as anyone renting farmland for cash will likely be getting their rent bumped up to keep up with the higher value of the asset that  they are renting.  Top cash rents for farmland in Central IL ran in the $180-220 per acre range two years ago.  Last year, I heard of land renting for as much as $325 per acre, and for the next crop, I have heard rents mentioned at over $400 per acre.  You can pencil out a profit with rents that high IF corn prices stay in the mid-three dollar range, and IF you don't have a crop failure.  Federal Crop Insurance can soften some of that risk...but it cant remove it entirely.

 

Higher farmland prices are great, if you own it, and if aren't trying to rent land to farm, but nearly every farm operation has a significant amount of rented acreage (over 70% of the farmland in IL is owned by someone other than the operator.)  So for farm operators, higher farmland prices have a dark side as well.