Why don't land values match commodity prices more closely?
As we begin 2018, it's interesting to look back on where farming has been recently and where farming is going. For me, one of the most interesting things to reflect upon is the farm economy.
As we go to press, the price of the three big commodities at the local elevator is as follows: Wheat is $5.80 per bushel, soybeans are $8.65 per bushel, and corn is $2.89 per bushel. Using benchmark yields for farmers in my neck of the woods, that means a farmer with 50 bushel wheat would gross just shy of $300 per acre in revenue. Thirty bushel soybeans would gross just shy of $260 per acre in revenue. And 125 bushel corn would gross a little more than $350 in revenue.
Look back to 2011, the base price for hard red spring wheat was $8.38 per bushel, soybeans were at $12.50 per bushel and corn was just north of $6 per bushel. So, the same farmer with 50 bushel wheat was grossing roughly $420 per acre, $375 per acre for soybeans, or a whopping $750 per acre for corn.
Here's my question: Why haven't land values come back to earth more pronouncedly when revenue per acre off that land has decreased between 30 and 50 percent? Why aren't land rents coming down more than they have? Why isn't land selling for far less per acre than it is?
Economics is defined by most dictionaries as a social science concerned chiefly with description and analysis of the production, distribution and consumption of goods and services. In terms of distribution of farmland and the economics of raising certain commodities on this farmland, one must assume that even at today's commodity prices, there must be some higher value to farmland than that according to "just the numbers."
One factor propping up the farmland prices and rental rates is the presence of out-of-state bidders on in-state farmland. I have seen several sales where investors from outside the state — California, as one example — have "like-kind exchange" money that they need to spend within an IRS-prescribed timeframe, so they are willing to pay more for farmland than local farmers who actually know the true value of the farmland.
One thing most people don't know is that while out-of-state investors do occasionally invest in farmland, such foreign ownership is actually forbidden if the investor isn't a citizen of the United States or Canada, or at least a permanent resident alien of the U.S. That's right — under old English common law, only with the King's approval could aliens acquire land. Why? Because the Crown knew controlling land was crucial to national security and also national control.
In fact, over half the states in our union have adopted statutes restricting foreign ownership of agricultural land. In North Dakota, the governing statute is North Dakota Century Code Chapter 47-10.1, which generally precludes non-U.S./Canada citizens — or permanent resident aliens — from acquiring an interest in agricultural land, either directly or indirectly. If that land is acquired by inheritance, it may be permissible to keep the land. The attorney general of North Dakota is the primary enforcement official for this section of code.
In the book Freakonomics, authors Steven D. Levitt and Stephen J. Dubnar apply traditional economic theory to non-traditional topics. With entertaining chapter titles like "Chapter 3: Why do drug dealers still live with their moms?" the book discusses several non-traditional topics that you wouldn't expect to be in a typical economics book. Levitt and Dubnar redefine "economics" as "the study of incentives."
Well, I think the most interesting part of farm economics in the next two to three years is going to be watching commodity prices and seeing where farmland and rental values track vis-à-vis these prices. I don't know which "incentives" will drive the discussion, but it appears to be something different than just a simple supply and demand relationship.