Buying or renting, acquiring farmland is not for the faint of heart

by | Apr 17, 2017 | 5 Ag Stories, News

by Ed Maixner

WASHINGTON – Land values may have declined a bit from the peak, but folks hoping to start farming or expand operations know that gaining access to new ground is still a challenge.

?You have to be wealthy to buy land,? declares Gary Schnitkey, agricultural economics professor at the University of Illinois. ?If you are starting out, you?re not going to be able to cash flow purchased farmland. There is no way that will work. Just think: 80 acres in central Illinois at $10,000 per acre ? you have to have $800,000 to buy just 80 acres; a million dollars for 100.? He points out that even firmly established farmers in his state are leaning heavily toward leases over buying land. Operators with more than 1,000 acres of cropland, on average, he says, own just 15 percent of the land they farm.

While cropland values in Illinois are among the highest in the country, prices have soared nationwide. Though they have come off their 2014 peak, USDA reports the national 2016 value of cropland at $1,330 per acre, on average, is still up by $800, or by 150 percent, since 2000.

SchnitkeyWhile the high costs of land and machinery make entry elusive for wannabe farmers, it has piled added debt onto current operators, leaving further land purchases unfeasible for many. USDA Chief Economist Robert Johansson projected in his recent annual outlook, for example, that American farmers? debt-to-asset ratio will climb to nearly 14 percent this year, up from a low of 11 percent in 2012, owing in part to slippage in farm real estate values. But that?s just the average, and the debt picture is darker in some sectors: about one in five producers with cotton, wheat, hogs or poultry as their primary commodity face a debt-to-asset ratio of more than 40 percent, he reported. Worse, more than a third of farmers under age 35 are highly or very highly leveraged.

Meanwhile, for those wanting access to farmland, renting is hardly an easy alternative.

True, renting land looks comparatively better than buying these days. The average U.S. cash rent for cropland, at $136 an acre in 2016, is 14 percent more than in 2000. But that rent level was just 3.2 percent of the average price of cropland, down markedly from 8 percent in 2000.

The ballooning spread between purchase cost and rental rates can be attributed to years of very low loan interest rates, which make the anticipated return on farmland comparatively higher than those on bonds and other investments, thus pushing land values up, Schnitkey said. And while farmland values have started coming back down, cash rents will also fall further because profits from farmland have fallen, he expects.

Creighton University?s Rural Mainstreet Index, a survey of rural bankers in nine states of the Great Plains and western Corn Belt, plus Colorado, reported a similar view of cropland rents for 2017 ? averaging $212 per acre, down 16 percent from last year.

Read more of the story at Agri-Pulse.com.