The North Central Farm Management Extension Committee is a team of 12 economists and attorneys who are well versed in the nuances of Midwestern farming.  They have developed a website, Ag Lease 101, where both landlords and tenants can gather information on lease trends.  Sample leases can also be downloaded and used as necessary.  Even with all the materials available on the site, there are times when having an attorney review a lease, or hiring a farm manager to set the cash rent amount, can be a prudent business practice. Keep in mind that higher commodity prices have considerably raised both the risks and returns to farming. And a million dollar farm, encumbered with bad lease terms, can cost an owner a lot of money.

An overview of the Sioux County sale recently appeared on the dtnprogressivefarmer.com website (Crazy Sioux County Land Auction Strikes Again).  As Marcia Zarley Taylor points out, the ag economy in this part of NW Iowa is unique – grain farmers have been making money, but the livestock sector is thriving as well. Many brokers and appraisers called this sale an abnormality, yet whenever you have several financially strong buyers all looking to purchase land in a specific location, the final sale price can be significantly higher than recent sales elsewhere.

Across the Midwest, all the record high prices the past 12 months have had the same common theme – the farm is ideally situated in an area where at least 2 farmers are willing and able to pay a premium for its location.  In many cases, these potential buyers adjoin the subject parcel or have driven their equipment by it for years hoping for the chance to own it someday.  In some areas, land seldom comes for sale and buyers know that they must buy now if they hope to buy at all. And sometimes, unusual variables come into play – a farmer wants to expand his livestock operation but must have additional land to spread the waste.

In all the situations mentioned above, location is the most important variable. Move a farm 5 miles in any direction and the sale price may be 25% lower… simply because the neighbors are different.  Or stated differently, record prices can be explained by looking at who the neighbors are; and non-record prices can be explained by looking at who the neighbors aren’t.  Landowners looking to sell in the next few months should keep this in mind – not every sale will set a record so make sure to set your expectations accordingly.

Earlier this week, U.S. Agricultural Secretary Thomas Vilsack outlined his priorities for the 2012 bill in a speech to workers in Ankeny, IA, as outlined in this abcnews.com article (Vilsack Says Farm Bill Must Improve Disaster Aid).  Aid to farmers affected by natural disaster, increased funding for agricultural research, and support for conservation projects were at the top of his list.  He admitted that USDA programs will need to be streamlined and easier to understand – a common complaint in the past.

I think that it is important to point out that nearly 75% of the existing $284 billion bill is used for nutrition, e.g. food stamps and school lunch programs.  Not that I don’t deem this programs worthy… they are.  But I think there are many people that believe that the Farm Bill only rewards the producers of agricultural products, without realizing that many of their friends and neighbors are also probably benefitting.

One important provision that likely will be eliminated in the new bill – direct payments to farmers and landowners.  While conceptually the idea of direct payments seemed like a reasonable way to transition farmers away from government support, the reality (especially with record high commodity prices) bordered on a public relations disaster – “rich farmers are earning record profits and still receiving government subsidies.”   This program is likely to be replaced with an improved insurance program that will protect producers when a true natural disaster strikes, as we’ve seen in Texas this year.

If history is a good indictor, then the final bill will likely be somewhat different than the pre-bill discussions.  And as mentioned earlier, the impact on the budget may be what ultimately decides the program’s fate.

Probably the biggest unknown at this stage is how long these low rates will last.  Some economists, notably Kansas State professor Allen Featherstone, believe that there will be a small uptick at some point – “Based on an analysis of Treasury yields, the market expects somewhat higher interest rates in the future; it expects inflation to rise, but only by about one percentage point”.  Another interesting insight from Featherstone – “When the financial crisis hit in October 2008, five-year Treasury Inflation Protected Securities (TIPS) spiked to four percentage points over inflation. Now, it has collapsed below zero. In other words, traders are paying to hold the money.”

These low rates obviously help borrowers, but they also have drawn investor cash from C.D.s and bonds into the farmland market.  When you combine the current interest rate environment with record grain prices, the argument that farmland values are merely a speculative bubble ready to burst seems a bit absurd. In reality, both farmers and investors are buying land for solid economic reasons, not for speculative purposes.

Fortunately, the University of Illinois has developed a system (Index Numbers of Illinois Farmland Values) that landowners can use as a guide.  Using USDA information, the formula utilizes a base index number from 1979 (100) and then adds or subtracts from the base each year to reflect whether land prices have gone up or down.  Is this system 100% accurate?  Probably not… the index is an average for the entire state and not for a specific county or township, and it doesn’t factor in what improvements may have been, or are currently, on the parcel. But many attorneys and other professionals find this methodology unbiased and in the absence of any other hard data, they can utilize the system to help determine the value of a property from years ago.

I would suggest using this index cautiously, especially if comparable sale information is available to use.  But if lacking good comps, this formula may be quite helpful in determining historic land valuations.