Farmers not overextending on farmland despite price increases

While there’s no end in sight to strong farmland prices and rental rates, farmers don’t seem to be overextending, said an Ohio State University Extension agricultural economist.

“Prices are sky high everywhere and continue to increase,” said Barry Ward, OSU Extension’s leader for production business management.

Factors pushing land and rental rates are likely to continue. Increasing commodity prices, profitability of row crops, strong international demand and low interest rates all are part of the equation.

Ward sees farmers purchasing land with plenty of equity and therefore doesn’t anticipate cash flow will be hurt if land values start to fall in the future.

“Farmers are buying land for the same reason as investors: good crop profitability and low interest rates,” he said. “They also want to be able to control the land for production purposes and provide for the next generation. If values drop 10 or 20%, they will still have the land to use as a business asset.”

Ohio’s cropland values rose from an average $2,400 per acre in 2000 to $4,000 per acre in 2010, while land rental increases have been a mixed bag in the state, Ward said. In areas where weather problems have crimped yields, rental rates have remained steady. In areas where good weather and strong yields have been the norm the past few years, rents are increasing.

Some farmers are providing services to landlords, such as putting in tile, clearing fencerows, managing livestock or plowing snow, in lieu of higher rents or to be more competitive.

To manage higher rental costs, farmers need to continue to put annual budgets together to analyze cash flow projections, and also should budget and plan three to five years out, said Ward.

Scenarios that could dampen land prices and rental rates include:

* An unanticipated decline in food demand from China and other emerging markets.

* A change in U.S. farm or energy policy.

* An aggressive move by the Federal Reserve to raise interest rates.

* Higher energy prices and other input costs that eat into farmer profits, lowering the amount they are willing to pay for land or rent.

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