What goes up, can also come downDon't assume higher cropland prices will last, expert says.
By: Jonathan Knutson, Agweek
DEVILS LAKE, N.D. — In 1900, cropland in Ramsey County in north-central North Dakota sold for an average of $10 per acre. Twenty years later, it fetched an average of $50 per acre. By 1940, the average price of cropland in the county had plunged to $17 per acre.
At a time when escalating cropland values are reaching record inflation-adjusted highs, it’s important to remember that land can decline in value, too, says Andy Swenson, farm management specialist with the North Dakota State University Extension Service.
A rare combination of strong farm profitability and low interest rates has pushed up land prices, but that could change quickly, he says.
“Will this perfect storm continue?” he asks.
Swenson spoke at the annual Lake Region Extension Roundup Jan. 8 and 9 in Devils Lake, N.D., the largest city in Ramsey County. More than 700 people attended each day of the event, sponsored by the NDSU Extension Service and the crop improvement associations in Benson, Cavalier, Nelson, Ramsey, Rolette and Towner counties.
The average value of rented cropland in Ramsey County shot from $371 per acre in 2002 to $978 per acre in early 2012, according to the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture.
The value of cropland in Ramsey County has risen sharply in the past year, too, although official statistics aren’t available yet, Swenson says.
Statewide in North Dakota, land values have risen for nine straight years. When annual figures for 2013 are available, they’ll show an increase for 10 straight years, Swenson says.
“It’s really exploded.”
The average value of cropland in the state is $1,350, according to a study released in August 2012. A new study will be released this summer.
“When we get the new 2013 numbers, we’re going to be higher than the (inflation-adjusted) peak” in 1981, when the average value of North Dakota cropland was $539 per acre, Swenson says.
The 1981 figure is the highest cropland values have reached in the state, factoring in inflation.
After 1981, the state’s average cropland value plunged 40 percent in the next six years to $318 per acre.
After many years of slow, erratic increases, the state’s average cropland value returned in 2005 to the 1981 level of $539 per acre.
“It took 24 years to get back to where we were in 1981,” Swenson says.
The cost of growing crops has risen sharply in the past few years, but strong crop prices and good yields generally allowed farmers to make healthy profits nonetheless, Swenson says.
If and when crop prices and yields decline, costs won’t necessarily drop, at least not right away, he says.
Costs “tend to be downward-sticky,” which means they usually decline slowly, he says. Farmers who borrowed money to buy land will suffer if high costs prevent them from generating enough income to make land payments.
Interest rates also bear watching. Currently, rates are extremely low, which encourages some investors to buy farmland rather than stick their money in certificates or deposits or other traditional investments.
If interest rates rise, farmland would become a less attractive investment and farmland values could fall sharply, Swenson says.
He points to one study that found a 2 percent increase in interest rates would lop 30 percent from farmland values.
Any reduction in federal crop insurance subsidies, which help support cropland values, also could cut into the price of farmland, he says.
A look at flexible rents
Dwight Aakre, another farm management specialist with the NDSU Extension Service, also spoke Jan. 8 in Devils Lake.
He looked at the relative benefits and potential shortcomings of cash and flexible rent. With the former, a farmer pays a fixed amount of money per acre to rent land. The amount doesn’t change regardless of yields or crop prices.
With flexible rent, the amount paid by the farmer can rise or fall, depending on crop prices or yields or both.
There’s no easy answer as to whether cash or flexible rent is better, Aakre says.
But flexible rent can be complicated, and farmers and landlords who use this method need a written agreement, not a verbal one, he says.