BY DOUG LEDUC, Greater Fort Wayne Business Weekly
dougl@fwbusiness.com
Northeast Indiana farmland has become more valuable as corn prices have risen in response to growing demand for the crop for ethanol production.
The Federal Reserve Bank of Chicago said last month the value of good farmland in northern Indiana rose 12 percent last year.
Based on 213 survey responses from agricultural bankers, the Federal Reserve bank calculated the value of farmland rose 9 percent on average for the district it serves, including most of Indiana, Illinois, Michigan, Wisconsin and Iowa.
With expectations of corn and soybean prices remaining well above their five-year averages, 58 percent of Indiana bankers responding to the survey expected farmland values to keep rising in the first quarter of 2007. Industry watchers say that has happened in northeast Indiana with rents as well as cropland sales.
Many area farmers renting cropland on a calendar year may have missed the impact of the trend because the leases were negotiated earlier in the fall when there was greater uncertainty about prices, said Craig Dobbins, an agricultural economist with Purdue University who coordinates an annual farmland value survey.
"I expect that these lease renewals contained some increase in the rental rate, but not a large amount," Dobbins said last month. "The leases that are being negotiated now or are yet to be negotiated will likely increase sharply.
"The last time that we were in this kind of a demand environment was in the mid-'70s. Based on the Purdue Land Value Survey, 1974-77 was a period of time when there were annual increases in rent between 14 percent and 30 percent. I won't be surprised if we saw something like that again."
The change in prices has stimulated a lot of discussion about flexible cash rent leases, he said, with high prices and a bumper crop triggering a bonus for the landlord, or a bad year due to factors such as a drought or excess rain triggering a rent reduction.
"This would be a way for both the tenant and landowner to share in the happy surprises of high prices while not locking a tenant into a high cash rent," Dobbins said. "Such leases would result in a variation in the landlords' income, and I think it will be interesting to see how many of these last."
Northeast Indiana farmers have seen corn prices go much higher. From early October through the end of last month, area cash prices for the crop nearly doubled, shooting to a little more than $4 per bushel from a little more than $2 per bushel.
The Federal Reserve Bank of Chicago explained the dramatic rise by pointing to data from the Renewable Fuels Association, which showed U.S. ethanol production capacity increased 27 percent to 5.6 billion gallons per year from 113 plants by early 2007.
Projected ethanol production requires 20 percent of the 2006-07 corn crop, up from 14 percent for 2005-06, the bank said.
The demand for corn to produce ethanol boosted projected total use of the crop to 11.8 billion bushels in 2006-07, it said.
"This pace of demand would leave U.S. ending corn stocks at 752 million bushels, corresponding to a stocks-to-use ratio of 6.4 percent. The last time corn stocks were this low was the 1995-96 marketing year. In addition, global stocks were at the lowest level in three decades," the bank said.
"Higher farm incomes prompted many farmers to pursue land purchases, especially given the increases in cash rents in 2006 and those anticipated for 2007."
Gonzalee Martin, an agricultural educator for the Allen County Cooperative Extension Service office, estimates rent on cropland has risen by at least 10 percent and as much as 20 percent on average in the county.
It is not unusual for farm families, which have lost the manager of an operation, to put cropland out for lease and require consulting to establish an appropriate price for it.
Since corn prices started rising in October, "I've worked with 25 to 30 widows in helping them figure out what their rent should be," he said.
"In the process of doing that, we're figuring out what's fair."
Some cropland in the county that leased for $120 an acre last year now rents for $140 per acre, and "I've seen rent go up as much as $15 to $30 an acre over what it was two years ago or last year," Martin said.
Acreage with an outstanding history of productivity is renting for as much as $175 an acre.
"Some farmers have contracted corn out to 2009 and they have an excellent idea of what they should be getting for their crops, so (they know) $140 an acre is not a bad deal," Martin said. "We have not noticed any of these farmers complaining."
Cropland auctions have been off since October for Schrader Real Estate & Auction, compared with the same period last year, because some owners have been holding back with the belief that prices will continue to rise, said Rex Schrader, president.
"October is when the land price really started to change because that's when the ... rally started in the grain markets. Since that time, we've seen production land in general up 10 percent to 35 percent," he said. "There's a part of the market that's gotten aggressive based on the current commodity prices."
The Purdue Land Value Survey released in August estimated average per-acre values in Indiana at $3,770 for top-quality farmland, $3,162 for average-quality and $2,509 for poor-quality.
Ethanol production has "really changed the complexion of the market," Schrader said. "Some of these farmers in near proximity to ethanol plants even get more aggressive because they can get a better price than farmers farther away from the plant." The impact of the pricing trend on cropland varies quite a bit by community and the quality of land for sale, but for most of the sales Schrader has tracked since October, the price has risen by at least 20 percent, he said.
But corn prices could come back down eventually if feed costs cause major cutbacks on livestock production, or worldwide corn production rises substantially, or the alternative fuel industry switches from corn ethanol to cellulose ethanol.
For farmers and other owners with cropland to sell, Schrader said, "the big question out there ... is how long lasting is this new market."