With profit margins tightening, taking the leap of faith to buy more farmland isn't a decision to be taken lightly, say Purdue Extension ag economists.
"The next couple of years for farmland values are going to be a little less certain than the last few years have been," says economist Craig Dobbins said. "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.
According to a Purdue survey, prices in Indiana alone for farmland have tripled in the last 10 years.
"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," Dobbins added.
Along with three colleages, Dobbins discusses the issue in the new paper, Farmland: Is it Currently Priced as an Attractive Investment?
The paper is sponsored by Purdue's Center for Commercial Agriculture and is co-authored by agricultural economists Tim Baker, Mike Boehlje and Michael Langemeier.
The four economists analyze farmland value trends and compare the attractiveness of investing in farmland with that of other investment portfolio choices, in terms of long-run risk, return and inflation hedge characteristics.
While the results showed that farmland can be a good investment when compared with stocks, they also showed that now might not be the right time to make a purchase.
"Even though our data confirms the conventional wisdom that farmland has high returns, low risk and is a good inflation hedge, the current price to rent ratio suggests this is not a good time to buy," the paper states. "Those purchasing farmland today should not ignore the prospect of buyer's remorse."
That sentiment is similar to the one asserted by Wall Street Journal writers Jesse Newman and Jacob Bunge, who heard from several Midwestern bankers and farmers on farmland investments, finding that prices for farmland aren't what they once were because farmers aren't in the position to buy.
"Falling land prices could cause economic ripples, curbing farmers' ability to borrow money to buy new acreage, crop supplies or machinery," the authors write.
"'Profits will be tighter, there's not going to be near the returns, and guys will have to be careful how much expenses they've got into an acre,'" Illinois farmer Greg Plunk told Newman and Bunge for the article, Falling Property Values Hint at Trouble on the Farm.
A farm analysis will help
For farmers who are still considering a farmland purchase, Dobbins said it's important to do an overall farm analysis to see how the added expense would fit.
"If the purchase fits in well with the plan for the farm business and there are sufficient cash reserves to withstand a downturn for the next two to three years, then go ahead," he said. "But if it in any way threatens the farm business then I would want to be very, very cautious about making this purchase."
While farmland values likely will hold steady for much of 2014, Dobbins said, cash rents likely would come down sooner. With current crop input costs, the breakeven price for corn would be $5 per bushel. Right now corn prices look to stay closer to $4 per bushel.
The shrinking or even disappearing profit margins mean growers won't be able to afford the high cash rental rates of recent years.
"Tightening crop margins may have a more immediate impact in the cash rent market," Dobbins said. "For those using flexible cash leases or crop-share leases, an automatic downward adjustment in 2014 will likely occur. For those with a multi-year lease established under the assumption that corn and soybean prices would remain high, there may be a need to visit with the landowner."