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Corn+Soybean Digest

What's It Worth?

In a number of Corn Belt states, the average selling price for farmland dropped last year for the first time in more than 10 years.

This drop - 1.9% for the year in Iowa - can be looked at in many ways. While it might make land more affordable, economists say it shouldn't be seen as a signal to either buy or sell.

The price decline may be from a lack of competitive bidding. Or it might be a slight correction given current lower commodity prices.

"Some people read it as a sign of an impending agricultural recession, or a recurrence of the farm crisis of the 1980s," says Mike Duffy, an Iowa State University ag economist.

"I don't see a slight decline in just one year as a cause for concern.

"It would take two or three years of declining land prices before I'd get worried," he adds.

For landowners, then, this drop represents a slight erosion in net worth. It probably won't have much impact on cropland rental prices, but it might stimulate land buying by crop producers who have money to spend.

William Edwards, an Iowa State extension ag economist, figures profit margins for corn and soybean growers averaged about $50 an acre from 1994 through 1997.

"This explains the upward pressure on land rents over the past few years," he says.

It probably accounts for the higher prices farmers were willing to pay for cropland, too, until this year.

Duffy's annual land price survey shows that the average price of farmland in Iowa during 1998 was just over $1,800/acre. That's still 16% below the peak average land price recorded in 1981, but is 129% above the low that occurred in 1986.

The big question is what kind of returns can be expected from $1,800/acre land.

Based on what he saw in September, Edwards projected that the 1998 crop would barely cover expenses. He bases this on a state-average corn yield of 143 bu/acre, with an average selling price of $2.05/bu, and a soybean yield of 47 bu/acre with an average market price of $5.20/bu. He figures government payments of $19/acre for both corn and beans to temper lower commodity prices.

Gross income, then, was $312.15/acre for corn and $263.40 for soybeans.

The average Iowa cash-rent price for land in 1998 was about $119/acre. So if you attempted to cash-flow land purchased for about $1,800/acre (assuming a 30-year, 8% mortgage), your land costs would be somewhere in the vicinity of $155/acre.

Iowa farmers reported non-land production costs for corn last year were nearly $210/acre. Non-land soybean production costs were right at $145/acre. Costs in 1999 should be about the same.

If we subtract non-land costs from the gross, we have a return to land of $102.15/acre for corn and $118.40/acre for soybeans.

If you compare these numbers with the land costs from ownership or average rental prices listed above, you'll note that neither crop fully covered either the rental or ownership. (Soybeans on rented land were close, though.)

If we hold non-land corn production costs even, we could cover the land costs by producing about 169 bu of corn per acre (26 bu more) or by selling the 143 bu we produced for $2.54/bu.

We'll assume we broke even with our 47 bu of soybeans on rented ground. To cover all the costs of land ownership, though, assuming we sell beans for $5.20/bu, we'd need to produce 58 bu/acre or sell the 47 bu for $6.38 per bu.

"You shouldn't expect to cash flow the total cost of purchasing land through crop production," says Don Gee, an Iowa State extension farm management specialist in Des Moines.

"The long-term return to land through crop production has been about 4%," he adds. "That's about half the interest rate. So in the short run, renting cash flows better than ownership."

Gee says there are other reasons to own land, though. For example, ownership guarantees long-term control of the asset, as opposed to year-to-year leasing. With the exception of a few years in the 1980s, land prices have generally increased, giving the owner a potential capital gain when the land is sold.

"Farmers should probably look at crop production and land ownership as two separate parts of their business," adds Don Hofstrand, an Iowa State extension farm management specialist at Mason City.

Over the long term, he says, land investments have been profitable.

"But actually owning land isn't a prerequisite for crop production," according to Hofstrand. "And land ownership eats up a huge amount of capital. If we're short on capital, it's better to use what we do have on inputs rather than on land ownership."

Gee agrees. "This doesn't mean we shouldn't buy land. But we must do it knowing that we may need to subsidize the purchase with income from land we already own or from other enterprises."

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