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Determining Return on Investment for a Farm

Return on Land InvestmentIt’s a question that occupies every farmer and landowner’s thoughts on a regular basis: What is the return on investment of my farm operation? Am I making the right decisions when it comes to my input costs? Am I marketing my crops effectively? These are important questions, and rightly so—any successful business owner knows that the key to making money and staying in business for the long term involves a high degree of attention to this key aspect.

A simple definition of return on investment (ROI) is “the ratio of money gained or lost on an investment relative to the cost of the investment.” This straightforward calculation allows one to analyze and compare investments in order to identify the best alternative for their situation. In essence, it helps one determine the best “bang for your buck.”

So, what is the best plan for ensuring a healthy farm ROI? First, it’s important to be mindful of all the different costs associated with owning and operating a farm. Simply staying on top of input costs, yields, and market prices is the foundational component for success. For many farmers and landowners, closely weighing the options regarding seeds, chemicals, fertilizer, and equipment is necessary when determining the return on investment.

Second, it’s often necessary to take the actual ROI into account when making farming decisions, because while a certain decision may seem too pricey initially, the actual ROI makes it a worthy investment. A good example of this is in precision technology, such as a GPS system for farm equipment, which can initially be quite expensive. This expense may be a hindrance, but by calculating the amount of planting overlap that could be cut as a result of a good guidance system, and the fuel and input costs associated with it, it could be determined that the cost of the guidance system could be covered in the first year of operation.

For landowners, and especially for landowners who have bought land as an investment, determining the ROI is no less important. They wonder whether land values will remain high, or if they will start to level off and even see a decrease. While experts offer varying opinions about the future prospects of land values, all agree that farmers and interested investors should carefully assess land values and farm financial health before doing any sort of investing.

According to Purdue Extension Agriculture economist Craig Dobbins: “The next couple of years for farmland values are going to be a little less certain than the last few years have been. Commodity prices have come down significantly in the last year, so these large returns we’ve kind of become accustomed to for the last few years have now shrunk. The probability of farmland values staying flat or seeing a small decrease is much bigger than the probability that we’re going to see another double-digit increase.” As such, Dobbins cautions prospective land buyers to make certain that there are sufficient cash reserves to withstand a downturn for the next two or three years, and if so, to go ahead with the purchase.

If you need help determining the ROI for your farming operation, contact UFARM. We have years of experience in helping landowners make the most of their land asset.

United Farm and Ranch Management (UFARM) is a Nebraska-based company devoted to meeting landowners’ needs. UFARM offers a full range of Nebraska land management services, including real estate sales, rural property appraisals, consultations and crop insurance. UFARM has operated in Nebraska since the early 1930’s.

 

 

Sources:
Frye, Justin. “Consider Expense vs. Return On Investment.” Farm and Ranch Guide. 12 Oct. 2013. Web. 12 Jun. 2014.
Stewart, Jennifer. “Farmland Value Shift Signals Need for Cautious Purchasing.” Purdue Agriculture News. Purdue University. 13 Feb. 2014. Web. 12 Jun. 2014.

 

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New Farm Bill Ends Direct Payments to Farmers

Farm Bill Effects of LandownersAfter multiple extensions and delays, the Agricultural Act of 2014—more widely known as the Farm Bill—was finally passed by Congress and signed into law by the president in February. Since then, it has been up to the USDA and other agencies to integrate the changes the bill contains, to work through the specific rules for the programs, and to oversee its implementation at ground level. Farmers themselves are interested in the portions of the bill that have changed in regard to agriculture policy and how these changes may affect them.

The vast majority of the Farm Bill costs still fall to the Nutrition program, also known as the Supplemental Nutrition Assistance Program (SNAP), at 80 percent. After that, 8 percent goes to expanded crop insurance programs, 6 percent to conservation programs, 5 percent commodities, and 1 percent “other.”

However, the end of direct payments has garnered the most attention on the agricultural scene. These payments were known as the Direct and Counter-cyclical Program (DCP) and the Average Crop Revenue Program (ACRE). These direct payments to farmers, first instated as a temporary program in the 1996 farm bill but retained in subsequent bills since, were the object of bipartisan ire for many years, since the payments didn’t depend on need or the condition of the crop, but solely on the number of acres owned, sometimes even if those acres did not grow an actual crop.

As a result, lawmakers backing the final iteration of the bill touted a victory in managing to pass something that affected such a wide array of interest groups, and that is expected to cut the budget by $17 billion over a decade.

While direct payments have come to an end, the bill does offer more robust insurance and revenue protection systems instead. In place of DCP and ACRE programs, the new farm bill will offer:

• Price Loss Coverage (PLC), a price protection program that triggers payments when market year average prices fall below target levels, which are called reference prices.

• Agricultural Risk Coverage County (ARC-C), a revenue protection program that triggers payments when the county revenue per acre falls below a benchmark revenue guarantee per acre set for the county.

• Agricultural Risk Coverage Individual (ARC-I), a revenue protection program that triggers payments when there is a revenue-per-acre shortfall on the individual farm that falls below a benchmark revenue guarantee per acre for that farm.

Dwight Aakre, North Dakota State University Extension Service farm management specialist, says this of the new ARC programs: “Unlike the ACRE program, where the entire state had to experience a revenue shortfall in the current year, the ARC program will use the county or the individual farm as the benchmark. This results in support payments when the revenue is less than the benchmark for either the county or the farm, which more closely reflects the actual condition an individual producer experiences.”

Producers taking advantage of the program will have to choose either the county or farm option. The county option pays up to 85 percent of the base acres, while the farm option is limited to a maximum of 65 percent of base acres.

The PLC option will work much like the previous DCP program. The PLC payment results when the covered commodity’s marketing price falls below the reference price.

The latest farm bill brings some significant changes to the programs offered to farmers. Do you need help further understanding these changes, and how they may affect you as a landowner? Let UFARM help you navigate the options available to you.

United Farm and Ranch Management (UFARM) is a Nebraska-based company devoted to meeting landowners’ needs. UFARM offers a full range of Nebraska land management services, including real estate sales, rural property appraisals, consultations and crop insurance. UFARM has operated in Nebraska since the early 1930’s.

 

Sources:
“2014 Farm Bill Eliminates Direct Payments.” North Dakota State University Agricultural Communication. NDSU Extension Service. 31 Jan. 2014. Web. 05 Jun. 2014.
Stewart, Jennifer. “Purdue Ag Economist Offers Insights to Latest Farm Bill.” The Prairie Star. The Prairie Star. 04 Jun. 2014. Web. 05 Jun. 2014.

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A Landowner’s Guide to the Conservation Reserve Program (CRP)

Ag Landowner's Guide to CRPWhen it comes to deriving an income from their farmland, landowners have a variety of options from which to choose. For many, farming it themselves is suitable. For others, leasing their land to others to farm is a good option. Another alternative for many landowners is to enter some of their land into the Conservation Reserve Program (CRP).

The Conservation Reserve Program is a land conservation program that offers an annual rental payment and cost-sharing to landowners who agree to remove the selected piece of land from agriculture production and agree to incorporate certain types of beneficial plant species to the land. The CRP’s long term goals are to improve environmental and water quality, prevent soil erosion, and improve natural wildlife habitat. A typical CRP contract lasts 10-15 years.

The CRP is administered through the local Farm Service Agency (FSA) office. The USDA periodically holds a general signup for entering land into the program on a competitive basis, based upon environmental ranking and cost. The general sign up is announced by the Secretary of Agriculture, but there is no set schedule.

Additionally, the USDA offers a continuous CRP signup, known as the CCRP, which offers farmers and landowners payment for more specific land improvements, such as contoured grass strips, riparian buffers, grass waterways, and the like. These improvements, chosen by the farmer or landowner, may be adopted and implemented on the selected parcel of land at any time, hence the name “continuous” sign up.

The Conservation Reserve Enhancement Program (CREP) exists as well. In the CREP, the state offers funding in addition to federal CRP funds to farmers and landowners in order to address more targeted environmental issues within the state.

The benefits of the CRP for landowners as well as the improvements to the nation’s environmental quality are wide-ranging. There are myriad success stories throughout the state of Nebraska and across the nation as a whole. Thanks to the voluntary participation by farmers and landowners, vast improvements have been made to soil and water quality, as well as to wildlife populations and habitats.

To be eligible for the CRP, a farmer or landowner must have owned or operated the land for at least 12 months prior to the previous sign up period, with the exception of land that has been acquired due to the previous owner’s death, a change in ownership as the result of foreclosure, or any land that was purchased by the new owner without the sole intention of placing it in CRP.

For the CCRP, you may sign up at any time. The annual rental income offered through the CRP, in addition to the improvements to the quality of your land, are two important reasons to consider the Conservation Reserve Program. If you are a landowner looking to find additional ways to maximize your land income, and think that entering some of your land into the CRP sounds like a good option for you, contact a UFARM Land Manager for help evaluating your options.

United Farm and Ranch Management (UFARM) is a Nebraska-based company devoted to meeting landowners’ needs. UFARM offers a full range of Nebraska land management services, including real estate sales, rural property appraisals, consultations and crop insurance. UFARM has operated in Nebraska since the early 1930’s.

 

Sources:  “What is the Conservation Reserve Program?” Farm Service Agency. USDA. 02 May 2014. Web. 12 May 2014.

“Conservation Reserve Program.” National Sustainable Agriculture Coalition. Sustainable Agriculture. Web. 12 May 2014.

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Demand for Quality Farmland Remains Strong in 2014

Real Estate Auction Sign-croppedDespite a downturn in grain prices and lower net farm income expectations among farmers and investors across the Midwest, demand for high quality farmland remains strong. A limited supply of such quality ground is contributing to a healthy demand for premium farm acres, even though prices for farmland in general seem to be moderating following the five year boom in land values.

While the primary competitors for such ground are farmers themselves, local investors seeking to expand their portfolios continue to show great interest in obtaining these valuable parcels of ground. When such land become available, both parties show healthy interest and appear willing to pay top dollar for it.

Even with this stable demand, landowners and farmers themselves remain cautious when it comes to investing in more ground. While many are better positioned now, with less debt, than during the 80’s land bust, they are seeking to invest smartly. For many, this means putting more effort into finding only the best quality farmland.

Mike Walsten, editor at Landowner, projects that farmland values in general will fall about 10% this year, based on current expectations. He says that demand for quality farmland will remain fairly stable, while demand for less quality farmland will continue to weaken, especially should profit margins further weaken at the same time.

In the longer term, Walsten is confident that farmers and landowners will weather these market corrections if they show restraint in adding more debt. He cautions that adding more debt to maintain spending will create problems—something that many producers learned the hard way during the 80s land boom and bust. Another factor that could greatly influence landowner decisions are rising interest rates, especially in the latter half of 2015. Higher interest rates would further dampen land values.

Still, investing in farmland remains one of the best and safest long term investments—something that landowners and especially outside investors recognize. One of the main drivers of recent interest in investing in farmland is based on the burgeoning world population, which is expected to peak at 9 billion by 2050, up from 7 billion today. Growth, especially in developing nations, will substantially drive up demand for food. In addition, the quest for biofuels remains a contributing factor to the high demand for quality farmland. In the US, for example, corn grown to produce ethanol accounts for 23 percent of total corn use.

It’s no secret that owners of quality farmland are poised to benefit from such trends, and while land values are currently softening, many experts remain bullish on land values going forward, especially for high quality farmland.

Are you seeking to make the most of your farmland, or are you looking to expand your portfolio and think that land ownership would be a good fit for you? Let the experienced professionals at United Farm and Ranch Management help you determine the best plan of action to benefit your unique situation.

Sources:

Birt, Nate. “Farmland Prices: Demand Ticks Up for Good-Quality Ground.” Agweb.com. Farm Journal. 07 Apr. 2014. Web. 24 Apr. 2014.

Murphy, Richard McGill. “The Best Long-Term Real Estate Investment: Farmland.” CNBC.com. CNBC. 24 Mar. 2014. Web. 24 Apr. 2014.

 

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An Alternative to Leasing: Custom Farming

Tractor-Baling-smallerLandowners have many decisions to make when it comes to their land, the most important of which is deciding who will farm it. Do they farm it themselves, or should they offer it for lease? The options vary depending upon the situation of individual landowners. Lease agreements may be the best option for some landowners, who might not have close ties to their farms, or who are geographically distant from their land. However, if one of these options doesn’t seem like the right fit, are there any alternatives? For many landowners, custom farming is the answer. In cases where a landowner might desire to remain in control of all the farming decisions himself, but might not have the time or physical resources available, custom farming offers a practical alternative.

In a custom farming arrangement, the landowner pays a set fee to a farm operator to perform all the labor in crop production. The farm operator provides the machinery needed to farm the land and assumes only the costs associated with machinery repair and maintenance. All the other decisions are made by the landowner, who also pays for all input costs, including chemicals, seed, fertilizer, and crop insurance. The landowner also receives all the income from sales and all eligible farm program payments.

There are obvious advantages to custom farming for both the landowner and the farm operator. For the farm operator, there are significantly less price and yield risks than in a leasing situation, and little to no additional operating capital is needed. Custom farming provides extra income at a set rate. Landowners benefit from not having to invest in expensive machinery, or in its maintenance and upkeep. Many landowners favor not having to negotiate rental rates or collect lease payments.

If a custom farming agreement sounds like a good fit for you and your land, it’s important to have a written agreement in place that provides specific details of what is expected of each party. Knowing ahead of time the amount of acres and type of soil that will be farmed, the farming practices—including tillage, watering, and fertilizer practices—that will be used, and the tentative planting and harvesting schedule, is key to a good business relationship. It’s a good idea to outline a payment schedule as well. Clear, open communication will prevent any potential misunderstandings.

Determining the appropriate custom farming rate can be the most complicated part of the custom farming agreement. Reports that list the average rate for your area and crop are available from various sources.

Another option for landowners includes custom leases, where the tenant gets a share of crop, anywhere from 15% to 25%. This gives the tenant a vested interest in the crop. The tenant is responsible for the cost of all mechanical operations on the farm. Custom leases allow both tenants and landowners to share in the good years.

Many landowners turn to professional land managers to help them with these considerations. Land management companies are able to match up landowners with those who are seeking to do custom farm work. They are also able to draft the agreement and help to determine an appropriate and mutually beneficial rate for the work supplied.

As a landowner, it’s important to know all the options available to you. Custom farming provides yet another way for you to manage your investment. Do you have questions about custom farming? Let UFARM supply the answers! We’re here to help.

Source: Edwards, William. “Custom Farming: An Alternative to Leasing.” Iowa State University Extension and Outreach. Iowa State University. Sep. 2009. Web. 13 Mar. 2014.macld they lease it to anoth

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Making Landlord-Tenant Relationships a Win-Win

Successful landowners know what it takes to build and maintain good working relationships with the producers who farm their land. With the high land values and cash rental rates of the last decade, it’s even more important for both landowners and tenants to go into their business relationship with clear goals and a well-defined agreement for how best to manage the farmland.

In many cases, today’s landlords are increasingly turning to professional farm management companies to help them navigate the decisions that need to be made regarding their farmland. Two main reasons account for this change. One is that agriculture is becoming more complicated and volatile. Anyone farming in the last decade, with its rapidly burgeoning land values and commodity prices, can attest to this. Another reason is that many of today’s landowners don’t have close ties to the farm. This may be the result of farmland being passed down to non-farming children or grandchildren, the landowner not being geographically close to the land, or the landowner acquiring the land as an investment, without any prior farming knowledge.

Landlord-tenant relationshipsWhatever the case, many landowners feel they lack the knowledge to farm the ground themselves, or to find someone who is both competent and trustworthy to farm their ground, and so they turn to the expertise of experienced professional land managers to do this for them.

One of the most important decisions that farm managers help their clients make is who to farm the land. Farm managers strive to take into account each client’s circumstances, gathering the pertinent information needed in each instance to make the right decisions. They ask many questions, finding out if the land has been rented to relatives or neighbors, and if the client would like to see that continue or not. Often, there are prevailing family concerns that need to be taken into account, and farm managers have experience when it comes to these often delicate situations.

Open, candid communication is the foundational component to successful relationships. This is especially true for landlords and tenants. A professional farm manager can be an effective liaison between landowner and farmer, securing a mutually beneficial arrangement for both parties. In many instances, an impartial third party negotiator is all it takes to encourage a positive landlord/tenant bond.

When it comes to landlord/tenant relationships, it’s important to negotiate a lease that is agreeable to everyone. Farm managers are knowledgeable about different type of leases. For instance, leases that share the profit and risk, known as flexible lease agreements, are becoming more commonplace. A flexible land lease agreement is an agreement in which the rent is not paid until the after the crop is harvested. The final rate is then based upon the actual prices and yields attained in a year, rather than a set rate. This type of lease may be a good fit for both parties, and will further promote a healthy and open business partnership.

Are you a landowner? Are you striving to get the most out of your farm? Let UFARM help you determine which strategies are a good fit for you, your tenants, and your valuable land asset.

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When Will Farmland Values Moderate?

corn chart

Courtesy of USDA

Nebraska landowners and farmers are always on the lookout for trends and forecasts of what they can expect for weather, commodity prices, and farmland values. The prospect of rising interest rates and lower commodity prices have many wondering if the high land value they’ve grown accustomed to over the last ten years is about to change.

Opinions vary, but many analysts agree that, for now, farmland values have reached their zenith. While most don’t expect there to be a bubble burst, it is generally agreed that the going rate for acres won’t continue to rise, and may have reached a plateau for the time being.

According to Iowa State Economics professor Michael Duffy, “It’s going to be more akin to a tire that gets a nail in it, a slow letdown,” he says. “A lot of it will depend if commodity prices stay in this downward trajectory or they flatten out.”

Grain prices tend to cycle from high-profit to low-profit. Corn prices have averaged $4.77 a bushel between 2006-2012, which is likely a new plateau in comparison to what they were prior to 2006. While the recent USDA report held bullish reports for corn, the corn price could still drop lower should the 2014 crop yield higher than average, resulting in the possible lowering of land values. In turn, should grain prices remain lower or recede, farmers will have less net cash income—a major driver of farmland values.

On the other end of the opinion spectrum is Terry Kastens, an agricultural economist at Kansas State University. He contends that “U.S. farmland values are at a ‘tipping point’ and could fall as much as 10 percent in 2014 as commodity prices flatten out.”

After a somewhat surprising USDA farm report on January 10th, that reported more bullish than expected corn bushels, it would seem that Duffy’s statement is more accurate, and that a leveling off of commodity prices might sustain current farmland values.

In Nebraska, farmland values rose 13 percent in the third quarter, according to the Kansas City Federal Reserve branch, whose area includes Nebraska. Some agricultural bankers said these figures, while still an increase, illustrate a moderating of prices from other recent values.

With so many variables at play, it is next to impossible to predict with certainty what Nebraska farmland values will do next, but the broader context seems to support a slow-down when it comes to money for farm acres.  In the meantime, the 2014 growing season and subsequent yields for the new crop will further determine if farmland values will continue to moderate in our state.

Let the land management professionals at UFARM help you stay on top of all the latest business and marketing trends for your farmland.  Contact United Farm and Ranch Management today.

Sources: (Martin, Andrew. “Iowa Farmland Values Hit a Record High.” Bloomberg.com. Bloomberg Businessweek. 12 Dec 2013. Web. 31 Jan. 2014.) (Schafer, Sara. “3 Reasons Farmland Values Could Head South.” Agweb.com. Agweb.com, 21 Nov. 2013. Web. 31, Jan. 2014.) (Hubbard, Russell. “Farmland Values Increase for Nebraska, Iowa in Quarter.” Omaha.com. 25 Jan. 2014. Web. 31 Jan. 2014.)

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What Makes Organic Farming A Fit For Your Farmland?

Land Management for Organic Farming in NebraskaDemand continues to grow in the nation for organically produced foods and grains, and many farmers and landowners across the nation are joining the growing organic trend. Nebraska farmers have also been taking notice. The increasing demand for certified organic products and food are opening up new markets, and many Nebraska farmers are stepping in to fill the niche. Have you ever considered the benefits of using your land to produce organic grains or foods? Would organic farming be a good fit for you and your farm?

The term “organic,” when applied to farming, means that foods and grains are produced without using pesticides, non-organic fertilizers, antibiotics, and hormones. Organically grown foods and grains must comply with mandated specifications and regulations set forth by the National Organic Program. Farms must meet specific requirements and be certified by the NOP in order to be considered organic. One of these requirements is that their fields be organic (free from certain synthetic fertilizers and chemicals) for three years before they are able to be certified.

Those applying to be certified must include an application to an accredited agent specifying the four following things:

• The type of operation to be certified
• A history of substances applied to land for the previous 3 years
• The organic products being grown
• The organic system plan describing practices and substances used in production

A drawback at the beginning of the process is that the grain they are producing for the first three years is unable to be sold at the organic prices, even though they are grown using organic practices. Despite the initial hurdles, the payoffs can be substantial; organically produced corn and soybeans can be very profitable for farmers, as they can sell for larger premiums.

Growing organic grains requires different practices than conventional farming, specifically in areas relating to soil composition, weed control, yields, and prices. In particular, weed control for organic farming is perhaps the area which is most divergent from conventional farming, since organic farmers are unable to use conventional methods of weed control, such as spraying herbicides on their crops. Instead, they use other means, such as mowing weeds when they are small, increased cultivation, and adding another crop to the rotation to discourage weed growth, such as rye.

In order for organic farming to be profitable, it is important to make certain that the price premium exceeds the yield loss and higher input costs associated with the practice. While organic farmers traditionally have lower yields, the price of organic grains can be expected to offset those lower yields.

If you’re thinking of moving your farmland into organic farming, it is necessary to be aware of the vast differences in farming practices that accompany the venture as opposed to conventional farming. It is also important to keep in mind the nature of your farmland, and if its soil composition is conducive to growing organically produced grain. Finally, consider the geographical location of your land and decide if it is in decent proximity to markets that seek out organically produced grains and food.

Let UFARM help you decide if organic farming is the right fit for you and your land. They have the expertise to match you with the right operator, and the insider’s knowledge of the specifics that go along with expanding or changing your landowning goals.

Contributing source: Schober, Marc. “Organic Trends Benefit Farmland.” Agweb.com. 15 Dec. 2010. Web. 23 Jan. 2014.

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What do 2014 Farm Bill negotations hold for landowners?

After multiple short-term extensions on the Farm Bill—the latest of which expired on December 31st—lawmakers are set to resume the next legislative session, and USDA secretary Tom Vilsack is confident that a deal can be reached on an updated version, and that it can be put up to a vote this month. Conferees on the committee have been working on a new iteration of the Farm Bill for the last three months.

The multiple delays are largely the result of disagreement over potential cuts to the federal Supplemental Nutrition Assistance Program (SNAP), which comprises a large portion of the Farm Bill. Last summer, both the House and the Senate proposed changes to the current law, with the House suggesting larger cuts to the Food Stamp program and also passing a separate piece of legislation that would separate the SNAP program from the Farm Bill altogether. With three bills to reconcile, the conference committee has had its hands full.

2014 Farm Bill While most national headlines have focused on the more politically polarizing SNAP cuts proposed, the likely elimination of direct payments to farmers is attracting the focus of farmers and landowners. The direct payment program has its roots in the 1996 Farm Bill, and has received bipartisan criticism for a number of years. Critics argue that these payments—regardless of crop prices, and often paid to those who haven’t even grown a crop—are costing taxpayers too much. But sources reveal other portions of the newly proposed bill that would expand other protections for farmers. “Negotiators say they are trying to modernize the system by balancing the needs of farmers with the interests of taxpayers,” writes Kristina Peterson. “But the emerging compromise, which would replace direct payments with beefed-up crop insurance and other protections for farmers, has already triggered criticism from outside groups who say it won’t radically reduce the amount of risk the federal government assumes in the agriculture industry.” While the end to direct payments might sound dismaying to many producers, the newly proposed expanded crop insurance protections, as well as new programs to help cover losses not addressed by insurance and other forms of assistance for farmers, may soften the blow to a certain extent. In statements made last Friday, Vilsack noted that whatever form of the Farm Bill is passed by Congress, the USDA is trying to ensure that they are able to put the new measures into effect in an expeditious manner. “Obviously we want to be in position … once the President signs the farm bill to be able to begin the process of implementation as quickly as possible,” Vilsack said.

In the meantime, farmers and landowners are still faced with some uncertainty until a final bill is successfully reconciled in Conference Committee and passed by Congress. Producers are already making their 2014 planting decisions, and even if a bill is successfully reconciled and passed with new farmer protections, it is unlikely that they will have much of an effect in 2014. In this way, it is likely that farmers and landowners will face similar uncertainties as they did in 2013.

The professional land managers at United Farm and Ranch Management stay on top of the changes happening in agriculture, from legislation, tax laws to farming practices.  If you would like to discuss how they can maximize your land’s potential, contact UFARM today.

Sources: (Peterson, Kristina. “Direct Payments to End, But Farm-Bill Policy Questioned.” The Wall Street Journal. 02 Jan. 2014. Web. 06 Jan. 2014.)  (Baum, Janelle. “Farm Bill Process Far From Over.” Prairie Farmer. Farm Progress. 06 Jan. 2014. Web. 06 Jan. 2014.)

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Nebraska Farm Land Prices: When’s the right time to buy or sell?

Land PricesIt’s a popular topic at every rural coffee shop: Will land values remain this remarkably high? It’s a good question.  With values that have been rising steadily over the last 20 years, and that have seen even larger gains in the last two to five years, farmers and landowners wonder if conditions will remain in place that will maintain these rates for the foreseeable future.

Rising land values have especially impacted farmers and landowners in Nebraska.  According the USDA, Nebraska’s all-land average value has doubled in the last five years, and in some areas has increased more than 125%. Additionally, the USDA’s land value survey reported a 33% increase for Nebraska farmland—the highest percentage gain of any state in the nation.

Conversations that involve record value gains in any market will include references to booms, bubbles, and bursts, and farmers and landowners in Nebraska are particularly aware of this. Many current producers experienced—or saw their parents experience—the farmland bubble burst in the 1980s, and are keenly sensitive to this issue today. Is the current farmland value bubble about to burst?

The answer to this question requires a basic understanding of what factors affect the rise and fall of prices. What has contributed to these record gains in Nebraska farmland values?

One is the current US monetary policy, with record low interest rates and a weak dollar. The weak dollar encourages agriculture exports, while the low interest rates discourage landowners from selling their land, thus creating a scarcity-driven land market and rising land values. Some agricultural economists predict that land values are set to go down, just because interest rates cannot go any lower than they are currently.

Another factor that affects land values is the US and global economies. Poor economic gains in both the US and global economies will eventually affect the disposable incomes of American households, and will in turn affect food prices.

Finally, and perhaps most obviously, commodity prices affect land values. Last year’s record drought forced commodity prices up, which in turn brought even greater land values to Nebraska and area states. Favorable weather conditions for the 2013 growing season will bring commodity prices down, which in turn might end up bringing farmland values to lower levels.

The outlook for Nebraska land values is up to debate. Some economists think that while there will be some more significant corrections in the land market—especially in states like Nebraska that have seen the most dramatic value increases—the chance of another burst is far less likely, simply due to the fact that today’s farmers are not as seriously leveraged as they were in the 1980s.

One thing is certain: Farmland prices are sure to remain a top concern for Nebraska farmers and landowners as we head into the 2013 harvest season. Please don’t hesitate to give us a call at United Farm and Ranch Management for any questions or concerns you may have when it comes to your land values and rental income.