November 14, 2017
By Seth Baker
For most Midwest farmland, the highest and best use (an appraisal term) is simple: the production of agricultural products, mainly corn and soybeans. But what about more marginal land, like flood plains, poor soils, timber and pasture? The answer is not as easy.
One common dilemma for flood plain land is whether or not to enroll the land in the Conservation Reserve Program. Flood plain land often has a high soil productivity rating, but crops frequently can be lost to springtime flooding, costing a season’s worth of income. Annual CRP payments often meet or exceed the likely income from this type of land with less risk.
More income, less risk. That’s a no-brainer, right?
Not so fast. Putting land — even marginal land — into CRP can often reduce its current value.
Because the income is set for a period of time, the rate of return a buyer expects also goes up. Typically, investors look for a return on marginal farmland of between 3% and 4%. So a farm that returns $250 per acre would be valued around $7,142 per acre, at 3.5%. If a CRP contract is paying $300 per acre, an investor would be looking for a return of between 4.5% and 6%, so the same farm would now be worth $6,000 per acre.
So this is the no-brainer, right? If it lowers the value, the answer should be no. Again, not so fast.
While the value may be decreased in the short term, the value over time will depend on the use at the end of the contract. If it can be put back into production, the value will return to tillable farmland value at the end of the contract. If the CRP is a tree planting, then going back to tillable production may not be easy. However, for the most marginal ground, turning a property into a good recreational tract may increase its value overtime.
We’ve seen recent sales of recreational properties going at a higher price than marginal farmland. Why? Because land value in that situation is no longer about economics; it’s about control of the land and its use for someone’s hobby.
Hunting and horses are two popular activities that need land to be best enjoyed. People with disposable income are willing to pay for control of the land, making the value about supply and demand. Having a CRP contract on recreational land is a good way to increase the value. The income can often offset some of the buyer’s payments over time.
Confused yet? Each situation is different and often can depend on the quality of the land, location, timing, and goals and objectives of the owners and potential buyers. It is important to check with a qualified land professional before making any long-term decisions regarding CRP contracts, selling or buying land. There are many factors that can affect the value of the land now and into the future. Knowing these factors before acting is the key to successful and enjoyable land ownership.
Baker is a certified appraiser and owns Field Level Agriculture, Mount Zion, Ill. He is a member of the Illinois Society of Professional Farm Managers and Rural Appraisers, whose members regularly contribute to this column. Email farm management questions to Carroll Merry at [email protected].
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