September 9, 2025 • 46 mins
Join Purdue ag economists Todd Kuethe and Michael Langemeier as they discuss Indiana farmland values on this, the first of two episodes reviewing the 2025 Purdue Farmland Values and Cash Rental Rates survey results. The survey shows Indiana land prices continue to rise and are anticipated to continue a modest increase for the rest of 2025 for most of the state. The episode shares insights into U.S. and Indiana farmland value trends, agricultural balance sheets, debt-to-asset ratios, the impact of various economic factors on land values, and future expectations for farmland values.
You can find the FULL video episode on our YouTube channel. Visit https://youtu.be/GOClD4XQz9Y to subscribe and watch
To learn more about Indiana's 2025 farmland cash rental rates, listen to the second podcast in this series, episode #195 on the Purdue Commercial #AgCast.
Podcast provided by Purdue University's Center for Commercial Agriculture. Slides and the transcript from the discussion can be found at https://purdue.ag/agcast194.
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For the full August Purdue Agricultural Economics Report, visit: https://purdue.ag/paer.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:06):
Welcome to Purdue Commercial Ag Cast,Purdue University Center for Commercial
Agriculture's Podcast, featuringfarm management news and information.
I'm your host, Michael Langemeier,Director of Purdue Center for Commercial
Agriculture, and joining me today isTodd Kuethe, Professor and Schrader
Endowed Chair in Farmland Economics.
Today's podcast is gonna focus on farmlandvalues, primarily coming from the 2025
(00:28):
Purdue farmland and cash rent survey.
We're also gonna stick our neckout here a little bit and talk
about factors that are important.
Looking at land values, uh, you know, thatare coming up in in the next year or so.
And so, so we'll also talk a little bitabout, fundamental factors impacting land
values for '26, and then talk a littlebit about some projections, for the rest
of '25 and maybe talk a little bit about,where things might be heading in '26.
(00:51):
And so that's what we wantto do in today's podcast.
And, we wanna start with lookingat some U.S. farmland values.
And so back up here a littlebit, we'll start with some U.S.
farmland values, and then we'll getinto what's going on in Indiana.
And Todd, really the trend is similar.
You know, the numbers are obviouslydifferent, but the trend is similar.
We're gonna start by talking about thestrength of the farm sector balance sheet.
(01:14):
Yeah.
So I, this is where I kind ofalways start when I talk to
groups about farmland, right?
Which is in part to justify why Ispend so much time studying farmland
and that it's such an importantpart of the U.S. farm economy.
According to the USDA balance sheet, theforecast of as of February, I know they've
got a new one coming out soon, over $4trillion of assets in the ag sector.
(01:40):
3.6 trillion of that isin real estate, right?
So, we're looking atreal estate making up.
About 83% of the asset base,which has been increasing
over the last, 15 to 25 years.
But it, usually hangsaround that 75 to 80.
What that basically means is thesimplest terms, is for every dollar
(02:02):
of stuff that farms own to producetheir commodities, 83 cents of
every dollar is dedicated to land.
And then land has also beeninching up in terms of the share
of total real or total debt.
So if we look at total farm sectordebt, we're now right at about two
thirds of debt is used, being usedto purchase and invested land.
(02:25):
And so farmers, even though we've hadvery high prices over the last, 10 to 15
years, people would, a lot of people wouldargue, farmers have been reinvesting.
And sort of, acquiringmortgages and purchasing land.
And that's a big part of what keepsour debt to asset ratio relatively low
and stable as a sector of the economy.
I had a graduate student that yearsago looked at debt to asset ratios
(02:46):
across different sector of theeconomy and the agricultural sector
kind of hung right in the middle.
If you look at largecorporations, they're.
Running much higher debt levels.
And then there's some very low debtand we kind of hang in that middle.
Yeah.
One of the things that's so importantabout looking at the balance sheet for a
farm, and lenders do this all the time,they obviously require a balance sheet
(03:07):
of their customers in addition to, manytimes a cash flow, projections or some
historical, net form income informationis when you look at financial stress.
It's both low net returns and thestrength of the balance sheet.
And one of the things that's really.
Helping reduce financial stressin these times of low net crop
returns is the fact that the balancesheet remains relatively strong.
(03:28):
Like you indicate, the debt to asset forthe U.S. farm sector is only about 13%.
But even on the larger farms, ifyou look at the FINBIN data outta
University of Minnesota, the debtto asset ratio is still only 30%.
That would be quite a bit lower than alot of, corporations and other industries.
And, and a lot, and a lot lower thana lot of smaller businesses, right?
Yes.
Like they're sort of equal size in termsof, uh, economic activity or employees.
(03:52):
The farm sector is very stable that way.
Let's talk a little bit about thetrend in, in land values, going
back to all the way to 1950.
So it's, it's, it certainly lookslike it's been an upward trend.
Yeah.
I put 1950 back, in here and Ialways toy with how far back to go.
In fact, the U.S. federal governmenthas collected farmland price information
since before the USDA was created.
(04:14):
Right.
'Cause agriculture is such a bigpart of the economy back then.
But I cut off the 1950 here in partto show, the one thing I always feel
like I have to show is the eighties.
Yeah.
Uh, part of it, I was born in1981 and so I've had a lot of
audiences continually to this day.
People will say like, well, youweren't around in the eighties.
You don't really understandwhat it was like.
Right.
Where we had that period of increasing ourinternational customer base, increasing
(04:37):
productivity, a lot of, use of technology.
So we had that rise in thelate seventies of income.
And then we had things like inflationand falling apart, trading partners
and vast other things that sortof led to that decline, across
the economy, but was particularlyhard hit here in the ag sector.
Right?
And so that, that eighties, whichwas a, was a astronomical rise and
(04:59):
fall that seventies, eighties period.
Now as we start to collect more timestarts to look more like a little bump.
Yeah.
Right.
And that's because we had sort ofa rebuilding period in the 1990s.
And then sort of post RFS, I thinkis where we can start to really see
the break in terms of aggregate landvalues in the country shooting up.
And this year, the USDA reportthat just came out in August,
(05:20):
puts national at $4,350 an acre.
One of the things I always haveto point out is a couple pieces
of information related to this.
One is the USDA, the base source ofinformation is what they call the June
area survey, which I believe used tobe called the June agricultural Survey.
And that's predominantly totrack product production.
But they also ask aboutland values and cash rents.
(05:43):
And so they, they're servingthousands and thousands of farmers.
These are farmer reported.
And then statisticians sort of acrossthe USDA are making adjustments and
considering that data, to produce sortof state level and national estimates.
And so that national, this is allof the U.S. so it moves very slowly,
even at that, you can see we've hada really strong uptick, particularly
(06:05):
since 2020, uptick like we observedsort of in that 2005- 2010 period.
Yeah.
It's truly, truly remarkable.
On this graph and other graphslooking at land values is the
sharp increase since 2007.
I mean, the difference that ethanolmade in terms of prices is well
documented, but it's also welldocumented that the increase in
prices, just shot up after that.
(06:26):
And even in the U.S. numbershere, it more than doubled.
The land values morethan doubled since 2007.
The increase has probably been two anda half to three times, in some of the
corn belt states in terms of land values.
And so obviously that was a veryimportant time period, for agriculture.
It continues today.
I mean, we use 35 to 40% of ourcorn crop for the ethanol industry.
(06:47):
And so, that's truly remarkable.
I want you to comment a little biton, the difference in cash rents
from the USDA survey, versus theIndiana, you know, Purdue survey
or Iowa survey, or Illinois survey.
Because they are different.
I mean, typically the USDA numbersare lower, than the numbers
coming from the state surveys.
Well, so one of the things is,again, all the USDA surveys
(07:08):
are coming from farmers, right?
So like the survey that we do hereat Purdue, we're surveying people
that interact with the land marketas part of their general profession.
But it's usually people like farmmanagers, appraisers, brokers, lenders,
and so they interact a lot morewith, sort of professionally managed
land, for lack of a better term.
(07:29):
The USDA also, when they survey a farm.
They just ask about the sort of averagecash rent on the land that they operate.
And as you know here in the cornbelt, particularly commercial
farms where they're supporting ahousehold with farm income, they're
dealing with multiple landlords.
Right.
And so there's a huge variation.
I think even within a farm, whatthey're paying for different parcels,
(07:51):
I think that key word thereis USDA is more average.
Yes.
Whereas the, the state, thestate numbers are really up,
really marginal, if you will.
They're on, they're on the edge.
This is what this is.
If a, if a track came up to rent, this iswhat we would expect, to rent that track
for now, what the average is for all theforms that all the farm in the area, but
this is what that track would rent for.
And those are, those are two differentnumbers, if you stop to think about.
(08:13):
So that's, that's really good.
And I think I wanted toask you that question.
The USDA probably does notseparate out arm's length.
Do they separate out arm's lengthtransactions from non-arm's length?
It's been a while since I'veread the survey documentation.
But no, they just ask whatis sort of the average cash
rent you are paying this year?
So you've got some rental rates therethat might be with people, you know,
(08:33):
relatives that might be quite low.
And again, I think one of the reasonsthat the USDI moves so slowly is there
for everybody that's, getting a sweetheartdeal from a relative and paying low rent.
There's also somebody overpaying the rent.
Yes.
'Cause they're trying to like,get some money to their parents.
Yes.
That won't pay for the nursinghome without, so you pay overpay
the rent to give 'em the cash.
(08:54):
There's all these sort of things whereyou start looking into the details.
The other, the analogy I often use at theUSDA numbers is that it's like a glacier.
Like it's moving in the right direction.
And a glacier will.
Change speed and change direction,but it takes a huge force or
just a sustained force to do so.
Right.
So this is kind of that glacialtrend of like what's generally
(09:17):
happening in the land market.
The, the other thing I wanted to pointout, Michael here, since you asked
about the differences, it's also sortof what we're capturing the value of.
So on our survey, for example,we ask about cropland.
And, I know that the Federal Reservesurveys, they'll say bare farmland.
But here the USDA usesthe term farm real estate.
(09:37):
Yeah.
Because that is buildings as wellas structures and improvements.
So if you have things like tile drainage.
Or hog barns or whatever, likethat should be all captured
in this sort of real estate.
I mean,.
I mean, there's quite a few thingsthat could be captured in that value.
It does omit the, operator'sdwelling, I believe.
Yeah.
But anything that's sort of a buildingand improvement related to farm
(10:00):
production is value is in there.
Now let's talk a little bit aboutthe trends in Illinois, Indiana
and Iowa compared to the U.S. And Ialways find this rather fascinating.
So a couple things.
One that I always point out is thatgold line from the previous, with
the national, when you start lookingat the, at the sort of the I state.
It looks virtually flat.
(10:22):
And if we go back farther, like pre1950, the, the, the U.S. and the corn
belt area sort of moved the same.
They didn't move much.
But really starting in the early seventiesto mid seventies is when you really start
to see a gap between Illinois, Iowa,Indiana, and the U.S. and aggregate.
(10:43):
And then among those three states, the Istates, Iowa seems to be the most dynamic.
It has the steepest inclines and declines.
And then Indiana, at least over sortof the last kind of 15 to 20 years
has been sort of the most stable.
And in a lot of years, sort of the lowest,even though it used to kind of hang in
(11:04):
the middle between Illinois and Iowa.
And then also, 'cause I used towork at the University of Illinois.
I started putting this together because,the farmers would like, there was a
rivalry between Iowa and Illinois.
Anytime I would say like the Iowanumbers went down, the crowd would cheer.
And I, like, you can't not havesomething the crowd would cheer for.
I was in Illinois yesterday and I toldthe audience that Iowa adjust more,
(11:25):
and then Indiana is the least of thethree, and then Illinois is in between.
And I think that's what thechart essentially is saying.
The reason why this is importantis, this is a land value chart,
but Iowa has seen a little bit moreweakness in cash rents this year.
And, you know, maybe that's hearkeningto what we might see in a year or two.
Because they typically move fast.
I've heard a number of peoplesay that what happens in Indiana
(11:46):
happened in Iowa last year.
Right.
That seems to be a.
So that's why we kind of look atthose, look at all three of those.
And then I wanna talk a little bit abouta slide from the Ag Economy Barometer.
Again, this is the July survey.
We do this every month.
Uh, but here's how it'sworded compared to today.
What are your expectations for farmlandprices in your area 12 months from now?
And so we don't.
We just say farmland.
(12:07):
This could be pasture,this could be crop land.
But this kind of gives us agauge from the U.S. perspective,
on what's happening to prices.
And, in the July survey, 29% thoughtthat they thought land prices were gonna
increase in the next 12 months, 14% lower.
That's been fairly consistent here.
Since the first of the year.
And so, and so what that tells mehere that, there's still more optimism
(12:28):
than pessimism, in U.S. farmland.
The way I always think about it is Itake the optimist and I subtract the
Yes, that's a good way to look at it.
pessimist.
And so we're at like a positive 15.
Yeah.
Which means there's like, you know, abit of, optimism or upward pressure.
Yeah.
I don't know if they, everybody'soptimistic about prices going up, but,
they believe prices will go up a littlebit if compare that, particularly when
(12:49):
we think about like, coming out of COVIDin like 2021, where we had very few
people expecting lower prices and knowthe bulk of people saying higher, right?
Yeah, yeah.
Definitely.
When we were in that doubledigit, increase in prices we had.
We had 50, 60, 60 5% of the peoplethinking that prices are gonna be higher.
(13:09):
Now we come down to Earth a little bit.
And it's, it's right.
29%.
Well, and that missing group, right?
That other sort of Yeah.
Little over half.
Or, or thinking stable, remain the same.
Right.
Remain and they're kindof thinking stable.
Yeah.
Right.
And that's about 50% right now.
And that's kind of consistent with ourexpectations, which we'll get into here.
Now let's turn to the Purduefarmland value and cash rent
(13:30):
survey, focusing on the land values.
And so give us a little history of thissurvey, and what numbers are reported.
In the report that's on the Centerfor Commercial Agriculture website.
Yeah, so, this survey has beenaround, since the mid 1970s.
Our department has done this annually,and it was initially created because
there was very little information aboutland markets, around Indiana, right?
(13:53):
So it was created by, somefaculty here and working with
stakeholders around the state.
And a lot of our respondents arestill people of similar professions.
I don't know how many of 'em are stillworking since the mid seventies, but,
um, they, they're generally people thatinteract with the land market as part
of their, regular professional life.
And so we're looking at a lot ofrural appraisers, farm managers,
(14:16):
brokers, ag lenders, and afew farmers in there as well.
But it's generally, people that, sortof in the land market professionally.
And we do ask about both land values andcash rents, but really what we're looking
for primary respondents is people that.
Can speak, or give information,about the land prices.
And so we collect three different prices.
(14:38):
So this survey goes out in June, sowe always ask about the current June.
But then we also ask aboutthe previous December, where
it was to end the last year.
In part 'cause we're also wantingto know what do they think is
going on for the rest of the year?
Where do they see it the next, this comingor projection for the end of, this, 2025.
And so we asked the respondentsabout, average land prices that
(15:00):
they're seeing in their countythat they operate, or work in.
And then we aggregate thatup to six regions across the
state and at the state level.
And we ask them about theland prices for three quality
grades, top, average, and poor.
And we don't define those.
We just ask them.
And then we also ask them toreport their long run corn yield
(15:22):
expectation for top average andpoor quality land in that county.
So that allows us to translatethings, prices to bushels yielded,
and can help control for thosequality difference, right?
So a top quality land in the southernpart of the state is very different
than what we think of top quality landin the northern part of the state.
So let's get into some of the numbers.
Before we get into the land values, we'vejust got a couple, slides on cash rents.
(15:45):
We've covered this in another podcast.
But just briefly talk a little bitabout, what cash rents did in 2025, Todd?
Yeah.
So, these two numbers, at least accordingto economic theory should be linked.
Yes.
Right?
We should expect sort of anequilibrium relationship there.
And we've seen cash rents increaseby one and a half to 2%, at the
statewide average, over the last, year.
(16:07):
And that's similar to what we'veseen in the last couple years.
So they're ticking up gradually.
And even though these two numbersare linked, we're gonna talk about
some factors that impact land values.
That's one of extremely beneficial, piecesof information in the survey report,
as we talk about, 11 different factorsand how they might impact land values.
When we talk about cash, rents, themain factors, net return to land.
(16:29):
And so that's the main factor.
When you talk about land, it'smore complicated than that.
There's a lot of other thingsthat impact land values, and so
even those, these are two linked.
They can move in different directions andthey certainly can increase or decrease
in different magnitudes because landvalues does have all these other factors.
So keep that in mind whenyou're looking at the report.
Let's get into the 2025, stateaverages by land quality.
(16:53):
Yeah.
So if we look at, the, surveyresults across the state of
Indiana, we've seen, sort of.
Middle level, increases.
Yeah, so thinking about like2020-2021 where we had like a
real uptick, we're not there.
But they're not exactly flat.
They're moving up a little bit, higherthan the, the rate of inflation.
(17:13):
But we've seen sort of a, sort of threeto seven or 8% increase, across the state.
For top quality land, we're nowlooking at, almost $15,000 an acre.
$14,826. For average, we're at, $12,250.
And then at the poor quality land,we're looking at about, $ 9,761,
I guess is what we have here.
(17:34):
So about, almost 10,000.
Um.
Per acre.
I don't wanna read too much into this,but I was a little surprised at the,
the large increase in poor qualityground because if there's any ground
that, where the net return to landis probably not very good, in '25,
it's, this is, this poor quality land.
Do you have any thoughts on that,Todd, for why that might have been
(17:55):
a little higher than the other two?
Okay, so there's a couple things.
One that's sort of like evergreen belief,which is that poor quality land is like
the the hardest to derive a value from,you see the most dispersion, right?
'cause some people are buying itfor recreational purposes or, you
know, they, they are gonna growcrops on 'em, but they mostly want
(18:15):
to deer hunt or something, right?
Yeah.
Um, and, and we see sort of smaller plotsand, and sort of like, you know, people
other than just farmers buying them.
And those will sort of like come and go.
The other thing, poor quality land issometimes used for is livestock, right?
So we have higher livestock returns.
It could be some of this poor qualityland is on that margin between do we
(18:35):
use it for pasture or do we use it for,
Even hay.
or silage.
Yeah, or hay.
Even hay.
Something like that.
Now that average at five, five and a halfpercent, that's not too different than
the historical average return on land.
Yeah.
That's about what we, sort of seekind of over the last 25 years.
You kind of put that in perspective.
And, we are talking about the factthat the report, that has the cash
rents and land values is in the AugustPAER (Purdue Ag Econ Report) report.
(18:58):
In that PAER report, there's alsoan article looking at investment
returns for land and other assets.
And so take a look at that and see howland compared to some other assets.
Yeah, I had a outstanding graduatestudent work with me on this in that it's.
The thing that comes up all the time.
'cause farmers are so heavilyinvested land, like we said at the
top of the podcast, right, thatthey wanna know, well what, what
would my money be like or returns belike if I put it in something else?
(19:21):
Um, and so once again, we find landsort of sits in the middle of all of
our investment opportunities and thatit offers a higher return than just
the, you know, just buying bonds.
Right?
Yeah.
The safest, investments.
But not as much risk exposureas we see in like equities.
Yeah.
Certainly when you comparefarmland to the S&P 500, the S&P
(19:42):
500 is considerably more risky.
And so you wouldn't expect to getthe same rate of return long term as
you would with the S&P 500, becausethere are differences in risk.
And so, that article talks a littlebit about, differences in risks too.
I just wanted to make anote that there are regional
farmland values in the report.
We're not gonna, dwell on thoseother than saying that, there was
(20:02):
some different trends between thenorth and the South this year and,
that, that's not that unusual.
But, it was rather obvious this year.
And so if you could justtalk a little bit about that.
Yeah, so there's a couple things.
The Southwest and southeast regionshad a decline in land values
relative to the year before.
Where all of the other, northern twothirds, had an increase of varying
(20:23):
degrees by, different parts of the state.
If you remember over the last coupleyears, the southwest and southeast regions
have been growing the fastest, right?
So again, sort of like when we'retalking about comparing Iowa and
Illinois, we also tend to see placesthat are increasing the most are often
the sort of first to, to decline.
Yeah.
That's sort of generallytrue of, of, of the economy.
(20:44):
And then also I think, all of thefactors that we think about when we
talk about what drives the land market,those are different in the south
southern part of state in the north.
Right.
So you're looking atdifferent commodity mix.
You're looking at different landuse or development potential.
Yeah.
So there's a lot, you know, we'regonna talk about the factors here,
but the factors would vary, by region.
Let's take a look at it, kinda historicaltrends since the late 1970s and top
(21:07):
average in poor quality land in Indiana.
Yeah, so the survey was startedagain to provide land information,
for Indiana stakeholders.
And then, the report was ableto survive even though the first
thing that happened was we see thatearly eighties, land price decline.
Right.
And then it was relativelystable from kind of the late
(21:28):
eighties through 2007-2008.
Just like we talk aboutthe national level, right?
And then we have this sort ofpost RFS, commodity price boom.
And we see prices reallyshoot up quite a bit.
And then sort of 2013 to 2019 pricesmoderated or held a little bit stable.
And then the most important thinghappened, I took over the survey.
(21:50):
Yeah.
And then prices just shot up.
And prices shot up.
Yeah.
No, it's, COVID, right?
So the sort of post COVID period iswhen we see another sort of dramatic
increase, again, not as much as wedid see that '20-'21, increase, but we
still have seen that sort of continuedincrease over the last few years.
And just to put this in perspective,since 2007, you look at average
quality land, it's close to a tripling.
(22:12):
You don't necessarily expect thatto happen for the next 25 years, but
certainly since 2007, we've had extremelystrong rates of return, for both poor,
average and top quality land in Indiana.
Now let's talk a little bitabout the land value factors.
There's 11 of these.
10 of these have been in thesurvey for a long time, and you
added the conversion recently.
(22:33):
And so, uh, so talk a little bit about,which one of these are negative, and
which one of these are positive interms of, explaining land values?
Yeah.
So, this is my favoritepart of the survey.
This is the part that I enjoy the most.
Uh, well, this in the commentswhen I get some, yeah.
'cause some of thecomments are pretty fun.
Um.
So we ask all of the respondentsabout these things that we generally
associate with moving land prices.
(22:55):
And we say, is this a positive force?
Is it pushing land prices up ora negative force in your area?
And we have 'em rate on a scale of, fivepositive, five being a strong positive.
Negative five being astrong negative force.
Zero, then of course being neutraldoesn't really matter, right?
And so we look at theaverage of those scores.
So when the value is greater thanzero, then we say on aggregate it seems
(23:20):
like this is putting upward pressure.
And when it's less than zero,then it's negative pressure.
And we can sort of compare across thosedifferent categories, but we can also
look at how that's changed over time.
So the graph that I have in the report, Ialways show sort of the last three years.
So if we look at what is puttingdownward pressure, we're seeing
an increased downward pressurerelative to last year for net income.
(23:44):
A lot of that I think is the downwardpressure we're seeing in crop prices.
In fact, the livestock price is actuallyone of the things putting upward pressure,
but crop price, putting downward pressure.
Interest rates, again, is still negativeas it has been in the last several years.
But it does show a much more muted effect.
I think people have kind of gotten usedto the interest rates that we have,
(24:04):
or maybe they're thinking, oh, rateswill come down a little bit and so
it's not quite as, much of a driver.
There's also a little bit ofdownward pressure from the return
to alternative investments, so maybeinvestors are looking other places.
And then exports of ag commodities,we ask about inflation.
It's putting a littlebit of upward pressure.
But again, not very strong.
(24:24):
Same thing with farmers liquidity.
How much cash do farmers have on reserveto buy land or invest in their farms?
Positive pressure, but again, waylower than it was a few years ago.
Agricultural policy, interestingenough, it's it's very small number.
But it is negative, whichI think is sort of weird.
I was kind of surprised I was,anytime they think that ag policy
is not supporting lands, I'malways a little bit curious.
(24:46):
It probably asks fairly generically,does it just say ag policy?
Agricultural policy.
I don't wanna read too much intothat, but I think that's, I talk when
I think ag policy, I think safety.
And Yes, and the safety netactually was strengthened, with the
legislation that came out this summer.
Some of these might have answeredthe survey before that, but I think
also when they talk about ag policy,probably we're thinking about tariffs.
(25:07):
Yeah.
And
Certainly the negative tariffs were,
it could be, it could betariffs, it could be tax policy.
It could, they could be anything.
It could a lot.
There's so much stuff that's policy.
But that typically isn't a real large bar.
I mean, when you took a look at thelarge, the large bars in the last
several years, obviously net income is.
It was, it was hugely positive in '23.
Now it's, it's quite negative.
That one moved a lot.
Liquidity moved a lot.
(25:28):
As, like you said, itwas really strong in '23.
It's still positive, butit's down a little bit.
Then one you haven't talked abouthere that I I'm glad you added it.
It was, it is conversion.
Yeah.
So I actually, I added it to last year'ssurvey and I think I mentioned it in the
report but didn't have it in the graph.
And I was waiting until I hadat least two years so we could
see if it, how it's moving.
And so we ask about land conversion.
(25:49):
Now I use the term conversion.
Specifically, the survey for a long timewe've asked about land transitioning
out of agricultural production, andwe've asked about, recreational land.
But I use the term conversion becausewhat we're seeing across the state,
and across the corn belt in generalright, is not just, converting
to subdivisions and golf courses.
(26:09):
Like we see sort of a sort of traditionalspread, but we're seeing a lot of
like infrastructure development, um,or new, like large civic projects or
things like conversion to, energy.
So solar energy, and wind.
So asking about like, how much do youthink conversion is, what's driving?
And again, it's, it's the strongestpositive force that we've, of the
(26:31):
factors people have identified.
Yeah.
And I think when you combine all thesefactors, I think it explains why the
land prices went up a little bit, but notnothing like they did a couple years ago.
Yeah.
And if you look back, I mean, allthe way back to, I think it was
2020, 2021, everything that couldimpact land prices was pushing it up.
And we did see record growth.
Yeah.
Right.
(26:52):
And so yeah, you're right.
I look at that sort of how,how tall are these bars?
But also how many are pointingup, how many are pointing down?
Let's take a look at the projections.
You take the, you have a June 25 numberand then you have a December 25 number.
What did they come up with in termsof the projected increases in land
values, in the next six months?
So they're actually, I wouldsay modestly optimistic.
(27:15):
Expect to see some growth, particularlyfor the poor and average quality land.
I would say sort of guarded optimism.
They think prices will come up, butnot like it's gonna be gangbusters.
But I was also sort of relieved thatthey weren't predicting declines.
Often it seems like if you goback to the old reports, they
actually tend to expect declines.
(27:37):
A little more pessimistic audience.
Yeah.
They're still, they'rehigher than inflation.
Yes.
And so I think that's very importantto point out, and I think they're
very consistent with, again, that thishistorical averages, that we've seen over
a long period of time, that five to 5.5%.
Very consistent with that.
Now, a couple of the things that are inthe report here that would be of interest
to people, in areas that are transitioningout of agriculture, i.e. around Indy
(28:00):
and other large cities like that.
You've got some questions relatedto, transition values per acre and
you call this a development premium.
So talk a little bit about, what thatis in '25 and how that's changed.
It looks to me like this has changeda little bit, in the last few years.
Yeah.
So we asked specifically about the pricepaid per acre for land transitioning
(28:22):
out of agriculture into some other use.
Right.
We do tend to think about that in termsof like suburban development kind of
things, but it's not limited to that.
Post 2020, we saw an explosion inthe value of transitional land, and
a real demand for people, there wasall the story, new stories around
COVID of like people wanting to moveoutta the country, get away from
(28:42):
congested areas or whatever, right?
And then this year we actually sawa little bit of a decline, in what
we're seeing that transitional value.
But I often look at sort of, I callthe development premium 'cause I
look at how does that transitionalland compared to top quality land.
And as a rule of thumb, over thelast, you know, 15, 20 years, any
(29:04):
farmer will sort of sell theirland for twice the price, right?
Or twice the value theyget for agricultural.
And so that's sort of the, thepremium I kind of look at it.
What is that gap betweenthe transition and average?
And if you flip forward for thoseviewing, this actually tracks really
well with construction permits, right?
So this is Indiana State levelinformation on housing permits.
(29:26):
If you look in the 1990s, we hadvery high development premiums.
And we had a lot of construction.
And then it really slowed kindof around that housing crisis.
And actually in Indiana hit here alittle first that we had slow down.
And then it's been sortof gradually rebuilding.
That development premium basicallyfollows that lock step, as
(29:46):
construction slows down, there'sa lot less conversion of farmland.
And then as that starts to tick, tickback up, we start to see it come up.
In the last year they've both comedown a little but the overall trend
of the last 10 years is gradually up.
Now we always have a caution about,using values directly outta the report.
There's a lot of variabilityin farmland values.
There's particularly a lot ofvariability in transition values.
(30:10):
And so, yes, just to note that,I mean, when you have an average
around $27-28,000, I mean, there'sobviously tracks are gonna double that.
So there's a lot of noise there.
We're not trying to pick up all ofthat variability, we're just trying
to pick up, what does that look likecompared to, average and top farmland.
Yeah.
'cause I mean, transitionalland is almost like snowflakes.
Yeah.
Where they're like,each is sort of unique.
(30:30):
Yeah.
And every time I present thissomewhere, somebody's like, well,
do you know about this one here?
That this one?
Like, and I don't know aboutthat specific one, probably.
Right.
But generally, this is kind of themomentum or the trend that we're seeing.
Right.
Yeah.
So let's, summarize the informationin the report, and then we'll kind
of switch gears here a little bitand talk about, some more about
factors impacting land values.
(30:51):
So, I sort of put it here at the end'cause I feel like when you're writing
a land value report, you get almostevery year title it, new record high.
Yeah.
Tends to trend up.
But we used that again at the state level.
But the difference is what we're seeingis more of a diversion or compared
to the last several years betweenthe southern third of the state and
the northern two thirds, where wesaw a dip in decline in land values.
(31:14):
And depending on the quality grade,we're looking sort of across a big
area, I'm sure there are local marketsthat had even more extreme declines.
Or even some increases, right?
But generally that bottom thirdof the state has been declining.
And we see an increase across theother, two thirds of the state.
The key drivers, impacting the marketthis summer, and I think we'll have
(31:34):
to continue to think about them goinginto next year, are lower returns,
lower incomes, lower crop prices, andhow that's putting downward pressure.
And again, on the upward pressure.
A lot of it's still land conversion.
How much of, how much continueddevelopment are we gonna see,
going into the next couple years?
And generally, the respondents areoptimistic about prices or should say
(31:56):
they're expecting prices to increasethrough the remainder of the year, which
is, not rare, but, not the most common.
Right?
We have a sort of, it seems likepeople are always pessimistic about
the land market, but not this year.
Now for those of you that wannadig a little deeper, we're
gonna talk about some of the keyfactors impacting farmland values.
And so we're gonna go overthis, relatively fast, but there
(32:19):
are slides, related to those.
Again, for those that want to reallythink about what impacts farmland
values and when we talk aboutfundamentals, what are we talking
about, in terms of fundamentals?
And Todd, so let's just ask you thequestion, when we think about a simple
model of farmland prices, what arethe fundamentals that we think about?
So I usually, when I present thisto an audience, I put a little break
in here 'cause I tell 'em there'sgonna be some math on the next slide.
(32:42):
Uh, and so, uh, this, we may have justlost most of our audience here, but.
It's what we learn in Economics,Finance 101, net present value, right?
So the value of any asset that weown is based on how much we think
we can earn by having it, right.
So we think about the priceof farmland generally.
(33:04):
As a rule of thumb, we look at all of theways we could make money from farmland.
So we could cash rent it out, wecould farm it ourselves, we could
develop it into something else, right?
Those expected returns.
And then we discount those.
So we divide them by some discount rate.
And that's because we want moneynow, not in the future, right?
So we're worried the futuremight not happen, right?
And so anything that you're goingto pay me next year, I'm not gonna
(33:27):
put as much confidence in thatas what you'll pay me this year.
And I think if you think about just thosetwo factors that's what describes a lot of
the variation that we see in land prices,but it also describes when you go to like
an auction or people are talking aboutrecent sales, a lot of what the diversion
will be will really be like, oh, I thinkthis could be that expected return.
(33:51):
Or, or I think thediscount rate's different.
Or, yeah, or I think that expectedreturn could grow or I, you know,
if I manage this, I could getthose costs down or whatever.
It should be worth more.
Or they discount futurereturns differently.
And so I often use the analogy of like.
It's the difference between loaning moneyto my wife or loaning money to my kids.
So my teenage kids, I would'vea much higher discount rate in
terms of probability I'll actuallyget paid back in the future.
(34:12):
And one of the reasons why we'retalking about this is the discount
rate and the growth rate when youcombine those two is only about 2%.
2.2%. 2.1%, 2.2% in there.
That's called the capitalization rate.
Typically it's really low right now.
And what these slides, talk aboutis what would happen if that
capitalization rate increased?
If, and why would that increase?
(34:33):
Will the interest rates stay high?
There probably will be at least somewhatupward pressure on that discount
rate, slash capitalization rate.
These slides kind of look at howsensitive, land prices really are, to
increases in discount rate and increasesin decreases in expected returns.
One of the things you have here alsois looking at a farm income forecast.
This is, we could spend alot of time on this slide.
(34:56):
We're not going to, but for farm incomeis forecast to be quite high, in 2025.
One of the things that's gonna drive ushow much money we can expect to earn it.
Right.
So I look at the USDA farm incomeforecast, to give me an understanding of
like, where is the ag sector at large.
So if we're looking at particular countyin Indiana, it's much better to look
at like prices and yields in that area.
Yeah.
But if we're looking at sort ofnation as a whole, what I think is
(35:17):
gonna happen to land prices, thebest source of information is USDA.
And so they do a farm income forecast.
So they produce an estimate,what they call their estimate.
Or their official measure of net farmincome, which is sort of the value
that the agriculture sector generatesand, and a retained earnings, I guess.
Right.
And, and this is sort of a, likea system of national accounts, so
(35:39):
we've got all the different kinds ofagriculture and so we'll have places
where it's rising and falling differentcommodities, but this is sort of
what's the aggregate picture look like?
A year to put out afterthe year Indy close.
So we, we find out in August orSeptember how the previous year did,
so to provide more timely information,they forecast it several times a year.
Yeah.
And so there's a lot of stuffin the ag media, like when it
(36:02):
says like U SDA is forecastingfarm income to do this or that.
So I've been for a number ofyears just sort of tracking
how that forecast evolves.
And so they're saying for 2025, nowthis is based on the February forecast.
Yes.
They've got a new one coming out shortly.
In early September.
Yes.
So we'll, we'll seesome adjustment likely.
That's when we'll find outwhat actually happened in 2024.
(36:22):
Yeah.
When that September report comes out.
But generally over thelast 20 years, 25 years.
The aggregate number endsup actually coming in higher
than the initial forecast.
So they're saying they'reexpecting a profitable year.
There's a chance if the pattern holds.
They will actually come in alittle bit higher than that.
Weird to say this at this current time.
(36:42):
But I, you, you gotta remember, there'sa lot of different numbers that are
going into that net farm income forecast.
And, and, and here in here where we'rehere in a state where, where, crop income
is so critical, and two of the forecastin terms of Indiana, you gotta remember
the U.S. livestock is more important,relatively more important, particularly
as you get into the Great Plains.
(37:03):
And I'm hearing that the net farmincome ' 25 coming out in September
could be higher than the Februarynumber because livestock processes are
actually stronger than we thought theywere going to be early in the year.
And also, you go back to the revision ofthe safety net, that happened this summer.
The safety net paymentsare probably higher.
And you combine those things withrelatively low, crop returns and
(37:23):
you're still looking at a prettyhigh, net farm income forecast.
And historically that sort of, whatI call here the August, or it'll
be September this year, that numberactually in more years than not, is
more optimistic than we had in February.
Yeah.
Just a reminder that, youknow, obviously cash rents are
very important to land values.
We've talked about that before.
(37:44):
They were up slightly well in '25.
And cash rent is where I actuallythink of as like sort of a local
measure of potential return, right?
So the joke I always make, is that theeasiest way to make money for farmland
is just rent it to somebody else.
Have them do the hard work.
That sort of gives us kindof a baseline expectation of
what we think we could earn.
Even though in the net presentvalue model, it's expected returns.
(38:06):
A lot of us use cash rents as aproxy for expected returns, but
you could use expected returns fora specific farm, in that forecast.
Just be careful when you're doing that.
It's expected returns, not the returnyou had in '25 or '21 or some kind
of historical return like that.
The other thing that I just wanted tonote briefly is discount rates are higher.
Right now, we do expect a little bitof softening, perhaps coming here in
(38:29):
the next month or two, when the fed,talks about interest rates again.
They're up quite a bit from whatthey were, two, three years ago.
Yeah.
And I have, for those watching threedifferent discount rates here, right?
So the bottom is the Fed funds rate.
So that's what the Fed sets forthe overnight deposit rate, right?
So that's set by policy.
The prime rate is, generally whatbanks give for short run loans
(38:53):
to their best business customers.
And so that's sort of thedifference between the prime and
the Fed funds rate is kind of thebank's cost of doing business.
And that stays relatively stable.
And then the other one is the farmmortgage rate, which I got from the
Federal Reserve Bank of Chicago.
So that does include the northern twothirds of Indiana, but it also has
(39:14):
Southern Peninsula, Michigan, a littlebit of Wisconsin, all of Iowa and
northern two thirds of Illinois as well.
So it's a little, you know,kind of the corn belt area.
And I often look at sort of that, thedifference between the farm mortgage rate.
And the prime rate or thedifference between farm mortgage
rate and the Fed funds rate?
Yeah.
Because I have a lot of peoplethat will say to me like,
oh, the Fed's gonna do this.
What's that gonna do to the land market?
(39:35):
Those two things do move together,but it's not as lockstep.
Yes.
So we've seen, over the last, severalquarters where we see farm mortgage
rates coming down, we also have seen,the federal funds rate coming down.
When we see the farm federal funds rate.
Shift up.
We often see the foreign, but it'snot a one-to-one correspondence.
Right.
Yeah.
I don't think the Fed iscontrolling mortgage rates.
(39:57):
They're influencing it.
Yes.
Um, but the bank activity inthe, in the organic market is,
Part of it is the length of loan.
Tend to think that the primerate's more of a short term rate.
Yes, that's exactly.
It's more correlated with theoperating, interest rate and operating
interest rates do not necessarily,perfectly correlate with mortgage rates
because it's a different timeframe.
One's a year and one oncea much longer than that.
(40:18):
And so, you know, sometimeswe discount the future more.
Sometimes we don't.
So there could be differencesin those over time.
And we're kind of seeing that inthis chart here, for a period of
time there, quite a long periodof time there, the mortgage rate
was quite a bit above the prime.
Now it's pretty block step, since 2020.
Well, and the other one I think about,or I talk to my students about that.
(40:39):
I always say, if you tellabout the difference between
operating and real estate loans.
If somebody defaults on a farmmortgage, the bank owns a farm.
Yeah.
If somebody defaults on a, operatingloan, then maybe they get the
grain in storage or something.
Which would you rather have?
And we're at a case where, like rightnow we would rather have the mortgage.
So that's why we see the sort of thedownward pressure on those rates.
(41:00):
Good point.
Just a couple other thingshere to kind of wrap up.
I did wanna talk a littlebit about, rent ratios.
The capitalization rates we'vetalked, before is essentially
cash rent divided by land value.
If you look at the regional, landvalues, the capitalization rates from
two to 2.5, where the state average isabout, I think 2.1, 2.2, someplace in
(41:21):
there at the lower end of that range.
but the historical average is five.
All that means is there's been someperiods over the last 50, 60 years
where the capitalization rate wasconsiderably above, the two to 2.5.
So you always have to ask your question.
We're gonna revert back to themean, probably not anytime soon.
That's kind of what ourthought process is here.
What I've done here in the P/rentratio is, I've just inverted that.
(41:42):
So rather than doing cash rentdivided by farmland price, I do
farmland price divided by cash rent.
And this is analogous to the PE ratio,that's used to look at the stock market.
For example, right now,the PE ratio is around 35.
for the s and p 500.
and so that just give youa frame of reference there.
The historical p/rent ratio is 20.
'Cause you know, 5% inverted is 20.
(42:03):
But in 2025, it's 40 to 50, depending on,the region, of Indiana that you look at.
So it is high.
Uh, so the question naturally toask here, just like if we had a high
PE ratio, are we overvaluing land?
Well, the short answer is.
We don't think so.
We're overvaluing land, but I dowanna have a word of caution here.
If you have a relatively high, prent ratio, what does that imply
(42:27):
about the future earnings, forthat, investment in real estate?
And the way to think about this, if youhave a relatively high, farmland to rent
ratio, that means that the farmland wasrelatively expensive, compared to the cash
rent that could be generated from that.
And so you wonder, you ask yourself,could there be buyer's remorse?
I paid quite a bit for this land.
Maybe I paid a little too muchbased on the fundamentals.
(42:50):
Cash rent being the fundamental.
And so maybe my rate of return, will notbe real strong, in some of these years
where the p rent ratio was relativelyhigh or farmland prices increased
faster than cash rent, which was, inrecent years that has been the case.
And so I, I've got a chart of the,historical, P/rent ratio, you know,
just showing the average and, andwhere we've been at, since 1960.
(43:12):
Essentially from 1960 to 2004, 2005.
Right before RFS, we werebelow, the, the, the 20.
And then since therewe've been above the 20.
And really, Todd, that's, reflectingthe change in interest rates,
the capitalization rate's beenlower, in recent years compared
to what it was historically.
And so that's what that's illustrating.
And then I look at the negativerelationship between 10 year rate
(43:35):
of return and P/rent 10 ratio.
And so if the P/rent 10ratio is relatively high.
Meaning farmland price compared to the10 year average earnings is relatively
high, that implies that, perhaps therate of returns can be a little bit
lower, than it would've been if we'dhave bought land at a lower P/rent ratio.
And so I, I've got a slide thatillustrates that and sure enough.
(43:58):
If we look at the latest number in 2015,we were looking at a rate of return
there of 5%, which is a little bit lower,than the long run of rate of return.
it just implies that there is anegative relationship between these two.
So if you do buy at a higherP/rent 10 ratio, you do tend to
have a little bit lower return.
But this chart is looking at 10 yearrates of return going back to 1960.
(44:20):
That average slight negative to 20%.
That seems like a large range.
That's tiny compared to the stock market.
Okay?
And so just remember that when you'relooking at this chart, that yes, there is
a negative relationship between these two.
And if you do buy land when it'srelatively expensive compared
to cash rent, you would expecta slightly lower rate of return.
(44:40):
But quite frankly, even the 25,15 number 5%, it's not too bad.
You add cash rent to that and you'relooking at, you know, seven and half, 8%
return, for land in the last 10 years.
Not too bad.
I also encourage you to take a look atthe, relationship between the 20 year
rate of return, and the P rent 10 ratio.
And the reason why I really likethis chart, Todd, is the first time I
(45:02):
showed this to one of my colleagues.
They said, holy cow.
If you look at rates of return from 1960up to the current period, the most recent
being 2005, 'cause we had to have 20years of data, they range from six to 14%.
That's not too bad.
Again, compare that to the stock market.
Even six percent's the worst, interms of the 20 year rate of return.
(45:23):
And we had several years there where itwas over 10%, probably half the time,
the rate of return was over 10% andthat's before the cash rent's added.
And so what this clearly shows isthere's a negative relationship, but
also shows that land's had a prettygood rate of return, since 1960.
And so I encourage you to takea look at the report, look at
the cash rents and land values.
(45:43):
It looks at rates of return offarmland compared to other assets.
And then take a look at, these P/rentratios, and, read through that.
A lot of good informationin that August PAER report.
So thanks for joining us.
Just a reminder that there is a separate,podcast for cash rent, so we also
encourage you to listen to that podcast.
Thank you.
Welcome to Purdue Commercial Ag Cast,Purdue University Center for Commercial
Agriculture's Podcast, featuringfarm management news and information.
I'm your host, Michael Langemeier,Director of Purdue Center for Commercial
Agriculture, and joining me today isTodd Kuethe, Professor and Schrader
Endowed Chair in Farmland Economics.
Today's podcast is gonna focus on farmlandvalues, primarily coming from the 2025
(00:28):
Purdue farmland and cash rent survey.
We're also gonna stick our neckout here a little bit and talk
about factors that are important.
Looking at land values, uh, you know, thatare coming up in in the next year or so.
And so, so we'll also talk a little bitabout, fundamental factors impacting land
values for '26, and then talk a littlebit about some projections, for the rest
of '25 and maybe talk a little bit about,where things might be heading in '26.
(00:51):
And so that's what we wantto do in today's podcast.
And, we wanna start with lookingat some U.S. farmland values.
And so back up here a littlebit, we'll start with some U.S.
farmland values, and then we'll getinto what's going on in Indiana.
And Todd, really the trend is similar.
You know, the numbers are obviouslydifferent, but the trend is similar.
We're gonna start by talking about thestrength of the farm sector balance sheet.
(01:14):
Yeah.
So I, this is where I kind ofalways start when I talk to
groups about farmland, right?
Which is in part to justify why Ispend so much time studying farmland
and that it's such an importantpart of the U.S. farm economy.
According to the USDA balance sheet, theforecast of as of February, I know they've
got a new one coming out soon, over $4trillion of assets in the ag sector.
(01:40):
3.6 trillion of that isin real estate, right?
So, we're looking atreal estate making up.
About 83% of the asset base,which has been increasing
over the last, 15 to 25 years.
But it, usually hangsaround that 75 to 80.
What that basically means is thesimplest terms, is for every dollar
(02:02):
of stuff that farms own to producetheir commodities, 83 cents of
every dollar is dedicated to land.
And then land has also beeninching up in terms of the share
of total real or total debt.
So if we look at total farm sectordebt, we're now right at about two
thirds of debt is used, being usedto purchase and invested land.
(02:25):
And so farmers, even though we've hadvery high prices over the last, 10 to 15
years, people would, a lot of people wouldargue, farmers have been reinvesting.
And sort of, acquiringmortgages and purchasing land.
And that's a big part of what keepsour debt to asset ratio relatively low
and stable as a sector of the economy.
I had a graduate student that yearsago looked at debt to asset ratios
(02:46):
across different sector of theeconomy and the agricultural sector
kind of hung right in the middle.
If you look at largecorporations, they're.
Running much higher debt levels.
And then there's some very low debtand we kind of hang in that middle.
Yeah.
One of the things that's so importantabout looking at the balance sheet for a
farm, and lenders do this all the time,they obviously require a balance sheet
(03:07):
of their customers in addition to, manytimes a cash flow, projections or some
historical, net form income informationis when you look at financial stress.
It's both low net returns and thestrength of the balance sheet.
And one of the things that's really.
Helping reduce financial stressin these times of low net crop
returns is the fact that the balancesheet remains relatively strong.
(03:28):
Like you indicate, the debt to asset forthe U.S. farm sector is only about 13%.
But even on the larger farms, ifyou look at the FINBIN data outta
University of Minnesota, the debtto asset ratio is still only 30%.
That would be quite a bit lower than alot of, corporations and other industries.
And, and a lot, and a lot lower thana lot of smaller businesses, right?
Yes.
Like they're sort of equal size in termsof, uh, economic activity or employees.
(03:52):
The farm sector is very stable that way.
Let's talk a little bit about thetrend in, in land values, going
back to all the way to 1950.
So it's, it's, it certainly lookslike it's been an upward trend.
Yeah.
I put 1950 back, in here and Ialways toy with how far back to go.
In fact, the U.S. federal governmenthas collected farmland price information
since before the USDA was created.
(04:14):
Right.
'Cause agriculture is such a bigpart of the economy back then.
But I cut off the 1950 here in partto show, the one thing I always feel
like I have to show is the eighties.
Yeah.
Uh, part of it, I was born in1981 and so I've had a lot of
audiences continually to this day.
People will say like, well, youweren't around in the eighties.
You don't really understandwhat it was like.
Right.
Where we had that period of increasing ourinternational customer base, increasing
(04:37):
productivity, a lot of, use of technology.
So we had that rise in thelate seventies of income.
And then we had things like inflationand falling apart, trading partners
and vast other things that sortof led to that decline, across
the economy, but was particularlyhard hit here in the ag sector.
Right?
And so that, that eighties, whichwas a, was a astronomical rise and
(04:59):
fall that seventies, eighties period.
Now as we start to collect more timestarts to look more like a little bump.
Yeah.
Right.
And that's because we had sort ofa rebuilding period in the 1990s.
And then sort of post RFS, I thinkis where we can start to really see
the break in terms of aggregate landvalues in the country shooting up.
And this year, the USDA reportthat just came out in August,
(05:20):
puts national at $4,350 an acre.
One of the things I always haveto point out is a couple pieces
of information related to this.
One is the USDA, the base source ofinformation is what they call the June
area survey, which I believe used tobe called the June agricultural Survey.
And that's predominantly totrack product production.
But they also ask aboutland values and cash rents.
(05:43):
And so they, they're servingthousands and thousands of farmers.
These are farmer reported.
And then statisticians sort of acrossthe USDA are making adjustments and
considering that data, to produce sortof state level and national estimates.
And so that national, this is allof the U.S. so it moves very slowly,
even at that, you can see we've hada really strong uptick, particularly
(06:05):
since 2020, uptick like we observedsort of in that 2005- 2010 period.
Yeah.
It's truly, truly remarkable.
On this graph and other graphslooking at land values is the
sharp increase since 2007.
I mean, the difference that ethanolmade in terms of prices is well
documented, but it's also welldocumented that the increase in
prices, just shot up after that.
(06:26):
And even in the U.S. numbershere, it more than doubled.
The land values morethan doubled since 2007.
The increase has probably been two anda half to three times, in some of the
corn belt states in terms of land values.
And so obviously that was a veryimportant time period, for agriculture.
It continues today.
I mean, we use 35 to 40% of ourcorn crop for the ethanol industry.
(06:47):
And so, that's truly remarkable.
I want you to comment a little biton, the difference in cash rents
from the USDA survey, versus theIndiana, you know, Purdue survey
or Iowa survey, or Illinois survey.
Because they are different.
I mean, typically the USDA numbersare lower, than the numbers
coming from the state surveys.
Well, so one of the things is,again, all the USDA surveys
(07:08):
are coming from farmers, right?
So like the survey that we do hereat Purdue, we're surveying people
that interact with the land marketas part of their general profession.
But it's usually people like farmmanagers, appraisers, brokers, lenders,
and so they interact a lot morewith, sort of professionally managed
land, for lack of a better term.
(07:29):
The USDA also, when they survey a farm.
They just ask about the sort of averagecash rent on the land that they operate.
And as you know here in the cornbelt, particularly commercial
farms where they're supporting ahousehold with farm income, they're
dealing with multiple landlords.
Right.
And so there's a huge variation.
I think even within a farm, whatthey're paying for different parcels,
(07:51):
I think that key word thereis USDA is more average.
Yes.
Whereas the, the state, thestate numbers are really up,
really marginal, if you will.
They're on, they're on the edge.
This is what this is.
If a, if a track came up to rent, this iswhat we would expect, to rent that track
for now, what the average is for all theforms that all the farm in the area, but
this is what that track would rent for.
And those are, those are two differentnumbers, if you stop to think about.
(08:13):
So that's, that's really good.
And I think I wanted toask you that question.
The USDA probably does notseparate out arm's length.
Do they separate out arm's lengthtransactions from non-arm's length?
It's been a while since I'veread the survey documentation.
But no, they just ask whatis sort of the average cash
rent you are paying this year?
So you've got some rental rates therethat might be with people, you know,
(08:33):
relatives that might be quite low.
And again, I think one of the reasonsthat the USDI moves so slowly is there
for everybody that's, getting a sweetheartdeal from a relative and paying low rent.
There's also somebody overpaying the rent.
Yes.
'Cause they're trying to like,get some money to their parents.
Yes.
That won't pay for the nursinghome without, so you pay overpay
the rent to give 'em the cash.
(08:54):
There's all these sort of things whereyou start looking into the details.
The other, the analogy I often use at theUSDA numbers is that it's like a glacier.
Like it's moving in the right direction.
And a glacier will.
Change speed and change direction,but it takes a huge force or
just a sustained force to do so.
Right.
So this is kind of that glacialtrend of like what's generally
(09:17):
happening in the land market.
The, the other thing I wanted to pointout, Michael here, since you asked
about the differences, it's also sortof what we're capturing the value of.
So on our survey, for example,we ask about cropland.
And, I know that the Federal Reservesurveys, they'll say bare farmland.
But here the USDA usesthe term farm real estate.
(09:37):
Yeah.
Because that is buildings as wellas structures and improvements.
So if you have things like tile drainage.
Or hog barns or whatever, likethat should be all captured
in this sort of real estate.
I mean,.
I mean, there's quite a few thingsthat could be captured in that value.
It does omit the, operator'sdwelling, I believe.
Yeah.
But anything that's sort of a buildingand improvement related to farm
(10:00):
production is value is in there.
Now let's talk a little bit aboutthe trends in Illinois, Indiana
and Iowa compared to the U.S. And Ialways find this rather fascinating.
So a couple things.
One that I always point out is thatgold line from the previous, with
the national, when you start lookingat the, at the sort of the I state.
It looks virtually flat.
(10:22):
And if we go back farther, like pre1950, the, the, the U.S. and the corn
belt area sort of moved the same.
They didn't move much.
But really starting in the early seventiesto mid seventies is when you really start
to see a gap between Illinois, Iowa,Indiana, and the U.S. and aggregate.
(10:43):
And then among those three states, the Istates, Iowa seems to be the most dynamic.
It has the steepest inclines and declines.
And then Indiana, at least over sortof the last kind of 15 to 20 years
has been sort of the most stable.
And in a lot of years, sort of the lowest,even though it used to kind of hang in
(11:04):
the middle between Illinois and Iowa.
And then also, 'cause I used towork at the University of Illinois.
I started putting this together because,the farmers would like, there was a
rivalry between Iowa and Illinois.
Anytime I would say like the Iowanumbers went down, the crowd would cheer.
And I, like, you can't not havesomething the crowd would cheer for.
I was in Illinois yesterday and I toldthe audience that Iowa adjust more,
(11:25):
and then Indiana is the least of thethree, and then Illinois is in between.
And I think that's what thechart essentially is saying.
The reason why this is importantis, this is a land value chart,
but Iowa has seen a little bit moreweakness in cash rents this year.
And, you know, maybe that's hearkeningto what we might see in a year or two.
Because they typically move fast.
I've heard a number of peoplesay that what happens in Indiana
(11:46):
happened in Iowa last year.
Right.
That seems to be a.
So that's why we kind of look atthose, look at all three of those.
And then I wanna talk a little bit abouta slide from the Ag Economy Barometer.
Again, this is the July survey.
We do this every month.
Uh, but here's how it'sworded compared to today.
What are your expectations for farmlandprices in your area 12 months from now?
And so we don't.
We just say farmland.
(12:07):
This could be pasture,this could be crop land.
But this kind of gives us agauge from the U.S. perspective,
on what's happening to prices.
And, in the July survey, 29% thoughtthat they thought land prices were gonna
increase in the next 12 months, 14% lower.
That's been fairly consistent here.
Since the first of the year.
And so, and so what that tells mehere that, there's still more optimism
(12:28):
than pessimism, in U.S. farmland.
The way I always think about it is Itake the optimist and I subtract the
Yes, that's a good way to look at it.
pessimist.
And so we're at like a positive 15.
Yeah.
Which means there's like, you know, abit of, optimism or upward pressure.
Yeah.
I don't know if they, everybody'soptimistic about prices going up, but,
they believe prices will go up a littlebit if compare that, particularly when
(12:49):
we think about like, coming out of COVIDin like 2021, where we had very few
people expecting lower prices and knowthe bulk of people saying higher, right?
Yeah, yeah.
Definitely.
When we were in that doubledigit, increase in prices we had.
We had 50, 60, 60 5% of the peoplethinking that prices are gonna be higher.
(13:09):
Now we come down to Earth a little bit.
And it's, it's right.
29%.
Well, and that missing group, right?
That other sort of Yeah.
Little over half.
Or, or thinking stable, remain the same.
Right.
Remain and they're kindof thinking stable.
Yeah.
Right.
And that's about 50% right now.
And that's kind of consistent with ourexpectations, which we'll get into here.
Now let's turn to the Purduefarmland value and cash rent
(13:30):
survey, focusing on the land values.
And so give us a little history of thissurvey, and what numbers are reported.
In the report that's on the Centerfor Commercial Agriculture website.
Yeah, so, this survey has beenaround, since the mid 1970s.
Our department has done this annually,and it was initially created because
there was very little information aboutland markets, around Indiana, right?
(13:53):
So it was created by, somefaculty here and working with
stakeholders around the state.
And a lot of our respondents arestill people of similar professions.
I don't know how many of 'em are stillworking since the mid seventies, but,
um, they, they're generally people thatinteract with the land market as part
of their, regular professional life.
And so we're looking at a lot ofrural appraisers, farm managers,
(14:16):
brokers, ag lenders, and afew farmers in there as well.
But it's generally, people that, sortof in the land market professionally.
And we do ask about both land values andcash rents, but really what we're looking
for primary respondents is people that.
Can speak, or give information,about the land prices.
And so we collect three different prices.
(14:38):
So this survey goes out in June, sowe always ask about the current June.
But then we also ask aboutthe previous December, where
it was to end the last year.
In part 'cause we're also wantingto know what do they think is
going on for the rest of the year?
Where do they see it the next, this comingor projection for the end of, this, 2025.
And so we asked the respondentsabout, average land prices that
(15:00):
they're seeing in their countythat they operate, or work in.
And then we aggregate thatup to six regions across the
state and at the state level.
And we ask them about theland prices for three quality
grades, top, average, and poor.
And we don't define those.
We just ask them.
And then we also ask them toreport their long run corn yield
(15:22):
expectation for top average andpoor quality land in that county.
So that allows us to translatethings, prices to bushels yielded,
and can help control for thosequality difference, right?
So a top quality land in the southernpart of the state is very different
than what we think of top quality landin the northern part of the state.
So let's get into some of the numbers.
Before we get into the land values, we'vejust got a couple, slides on cash rents.
(15:45):
We've covered this in another podcast.
But just briefly talk a little bitabout, what cash rents did in 2025, Todd?
Yeah.
So, these two numbers, at least accordingto economic theory should be linked.
Yes.
Right?
We should expect sort of anequilibrium relationship there.
And we've seen cash rents increaseby one and a half to 2%, at the
statewide average, over the last, year.
(16:07):
And that's similar to what we'veseen in the last couple years.
So they're ticking up gradually.
And even though these two numbersare linked, we're gonna talk about
some factors that impact land values.
That's one of extremely beneficial, piecesof information in the survey report,
as we talk about, 11 different factorsand how they might impact land values.
When we talk about cash, rents, themain factors, net return to land.
(16:29):
And so that's the main factor.
When you talk about land, it'smore complicated than that.
There's a lot of other thingsthat impact land values, and so
even those, these are two linked.
They can move in different directions andthey certainly can increase or decrease
in different magnitudes because landvalues does have all these other factors.
So keep that in mind whenyou're looking at the report.
Let's get into the 2025, stateaverages by land quality.
(16:53):
Yeah.
So if we look at, the, surveyresults across the state of
Indiana, we've seen, sort of.
Middle level, increases.
Yeah, so thinking about like2020-2021 where we had like a
real uptick, we're not there.
But they're not exactly flat.
They're moving up a little bit, higherthan the, the rate of inflation.
(17:13):
But we've seen sort of a, sort of threeto seven or 8% increase, across the state.
For top quality land, we're nowlooking at, almost $15,000 an acre.
$14,826. For average, we're at, $12,250.
And then at the poor quality land,we're looking at about, $ 9,761,
I guess is what we have here.
(17:34):
So about, almost 10,000.
Um.
Per acre.
I don't wanna read too much into this,but I was a little surprised at the,
the large increase in poor qualityground because if there's any ground
that, where the net return to landis probably not very good, in '25,
it's, this is, this poor quality land.
Do you have any thoughts on that,Todd, for why that might have been
(17:55):
a little higher than the other two?
Okay, so there's a couple things.
One that's sort of like evergreen belief,which is that poor quality land is like
the the hardest to derive a value from,you see the most dispersion, right?
'cause some people are buying itfor recreational purposes or, you
know, they, they are gonna growcrops on 'em, but they mostly want
(18:15):
to deer hunt or something, right?
Yeah.
Um, and, and we see sort of smaller plotsand, and sort of like, you know, people
other than just farmers buying them.
And those will sort of like come and go.
The other thing, poor quality land issometimes used for is livestock, right?
So we have higher livestock returns.
It could be some of this poor qualityland is on that margin between do we
(18:35):
use it for pasture or do we use it for,
Even hay.
or silage.
Yeah, or hay.
Even hay.
Something like that.
Now that average at five, five and a halfpercent, that's not too different than
the historical average return on land.
Yeah.
That's about what we, sort of seekind of over the last 25 years.
You kind of put that in perspective.
And, we are talking about the factthat the report, that has the cash
rents and land values is in the AugustPAER (Purdue Ag Econ Report) report.
(18:58):
In that PAER report, there's alsoan article looking at investment
returns for land and other assets.
And so take a look at that and see howland compared to some other assets.
Yeah, I had a outstanding graduatestudent work with me on this in that it's.
The thing that comes up all the time.
'cause farmers are so heavilyinvested land, like we said at the
top of the podcast, right, thatthey wanna know, well what, what
would my money be like or returns belike if I put it in something else?
(19:21):
Um, and so once again, we find landsort of sits in the middle of all of
our investment opportunities and thatit offers a higher return than just
the, you know, just buying bonds.
Right?
Yeah.
The safest, investments.
But not as much risk exposureas we see in like equities.
Yeah.
Certainly when you comparefarmland to the S&P 500, the S&P
(19:42):
500 is considerably more risky.
And so you wouldn't expect to getthe same rate of return long term as
you would with the S&P 500, becausethere are differences in risk.
And so, that article talks a littlebit about, differences in risks too.
I just wanted to make anote that there are regional
farmland values in the report.
We're not gonna, dwell on thoseother than saying that, there was
(20:02):
some different trends between thenorth and the South this year and,
that, that's not that unusual.
But, it was rather obvious this year.
And so if you could justtalk a little bit about that.
Yeah, so there's a couple things.
The Southwest and southeast regionshad a decline in land values
relative to the year before.
Where all of the other, northern twothirds, had an increase of varying
(20:23):
degrees by, different parts of the state.
If you remember over the last coupleyears, the southwest and southeast regions
have been growing the fastest, right?
So again, sort of like when we'retalking about comparing Iowa and
Illinois, we also tend to see placesthat are increasing the most are often
the sort of first to, to decline.
Yeah.
That's sort of generallytrue of, of, of the economy.
(20:44):
And then also I think, all of thefactors that we think about when we
talk about what drives the land market,those are different in the south
southern part of state in the north.
Right.
So you're looking atdifferent commodity mix.
You're looking at different landuse or development potential.
Yeah.
So there's a lot, you know, we'regonna talk about the factors here,
but the factors would vary, by region.
Let's take a look at it, kinda historicaltrends since the late 1970s and top
(21:07):
average in poor quality land in Indiana.
Yeah, so the survey was startedagain to provide land information,
for Indiana stakeholders.
And then, the report was ableto survive even though the first
thing that happened was we see thatearly eighties, land price decline.
Right.
And then it was relativelystable from kind of the late
(21:28):
eighties through 2007-2008.
Just like we talk aboutthe national level, right?
And then we have this sort ofpost RFS, commodity price boom.
And we see prices reallyshoot up quite a bit.
And then sort of 2013 to 2019 pricesmoderated or held a little bit stable.
And then the most important thinghappened, I took over the survey.
(21:50):
Yeah.
And then prices just shot up.
And prices shot up.
Yeah.
No, it's, COVID, right?
So the sort of post COVID period iswhen we see another sort of dramatic
increase, again, not as much as wedid see that '20-'21, increase, but we
still have seen that sort of continuedincrease over the last few years.
And just to put this in perspective,since 2007, you look at average
quality land, it's close to a tripling.
(22:12):
You don't necessarily expect thatto happen for the next 25 years, but
certainly since 2007, we've had extremelystrong rates of return, for both poor,
average and top quality land in Indiana.
Now let's talk a little bitabout the land value factors.
There's 11 of these.
10 of these have been in thesurvey for a long time, and you
added the conversion recently.
(22:33):
And so, uh, so talk a little bit about,which one of these are negative, and
which one of these are positive interms of, explaining land values?
Yeah.
So, this is my favoritepart of the survey.
This is the part that I enjoy the most.
Uh, well, this in the commentswhen I get some, yeah.
'cause some of thecomments are pretty fun.
Um.
So we ask all of the respondentsabout these things that we generally
associate with moving land prices.
(22:55):
And we say, is this a positive force?
Is it pushing land prices up ora negative force in your area?
And we have 'em rate on a scale of, fivepositive, five being a strong positive.
Negative five being astrong negative force.
Zero, then of course being neutraldoesn't really matter, right?
And so we look at theaverage of those scores.
So when the value is greater thanzero, then we say on aggregate it seems
(23:20):
like this is putting upward pressure.
And when it's less than zero,then it's negative pressure.
And we can sort of compare across thosedifferent categories, but we can also
look at how that's changed over time.
So the graph that I have in the report, Ialways show sort of the last three years.
So if we look at what is puttingdownward pressure, we're seeing
an increased downward pressurerelative to last year for net income.
(23:44):
A lot of that I think is the downwardpressure we're seeing in crop prices.
In fact, the livestock price is actuallyone of the things putting upward pressure,
but crop price, putting downward pressure.
Interest rates, again, is still negativeas it has been in the last several years.
But it does show a much more muted effect.
I think people have kind of gotten usedto the interest rates that we have,
(24:04):
or maybe they're thinking, oh, rateswill come down a little bit and so
it's not quite as, much of a driver.
There's also a little bit ofdownward pressure from the return
to alternative investments, so maybeinvestors are looking other places.
And then exports of ag commodities,we ask about inflation.
It's putting a littlebit of upward pressure.
But again, not very strong.
(24:24):
Same thing with farmers liquidity.
How much cash do farmers have on reserveto buy land or invest in their farms?
Positive pressure, but again, waylower than it was a few years ago.
Agricultural policy, interestingenough, it's it's very small number.
But it is negative, whichI think is sort of weird.
I was kind of surprised I was,anytime they think that ag policy
is not supporting lands, I'malways a little bit curious.
(24:46):
It probably asks fairly generically,does it just say ag policy?
Agricultural policy.
I don't wanna read too much intothat, but I think that's, I talk when
I think ag policy, I think safety.
And Yes, and the safety netactually was strengthened, with the
legislation that came out this summer.
Some of these might have answeredthe survey before that, but I think
also when they talk about ag policy,probably we're thinking about tariffs.
(25:07):
Yeah.
And
Certainly the negative tariffs were,
it could be, it could betariffs, it could be tax policy.
It could, they could be anything.
It could a lot.
There's so much stuff that's policy.
But that typically isn't a real large bar.
I mean, when you took a look at thelarge, the large bars in the last
several years, obviously net income is.
It was, it was hugely positive in '23.
Now it's, it's quite negative.
That one moved a lot.
Liquidity moved a lot.
(25:28):
As, like you said, itwas really strong in '23.
It's still positive, butit's down a little bit.
Then one you haven't talked abouthere that I I'm glad you added it.
It was, it is conversion.
Yeah.
So I actually, I added it to last year'ssurvey and I think I mentioned it in the
report but didn't have it in the graph.
And I was waiting until I hadat least two years so we could
see if it, how it's moving.
And so we ask about land conversion.
(25:49):
Now I use the term conversion.
Specifically, the survey for a long timewe've asked about land transitioning
out of agricultural production, andwe've asked about, recreational land.
But I use the term conversion becausewhat we're seeing across the state,
and across the corn belt in generalright, is not just, converting
to subdivisions and golf courses.
(26:09):
Like we see sort of a sort of traditionalspread, but we're seeing a lot of
like infrastructure development, um,or new, like large civic projects or
things like conversion to, energy.
So solar energy, and wind.
So asking about like, how much do youthink conversion is, what's driving?
And again, it's, it's the strongestpositive force that we've, of the
(26:31):
factors people have identified.
Yeah.
And I think when you combine all thesefactors, I think it explains why the
land prices went up a little bit, but notnothing like they did a couple years ago.
Yeah.
And if you look back, I mean, allthe way back to, I think it was
2020, 2021, everything that couldimpact land prices was pushing it up.
And we did see record growth.
Yeah.
Right.
(26:52):
And so yeah, you're right.
I look at that sort of how,how tall are these bars?
But also how many are pointingup, how many are pointing down?
Let's take a look at the projections.
You take the, you have a June 25 numberand then you have a December 25 number.
What did they come up with in termsof the projected increases in land
values, in the next six months?
So they're actually, I wouldsay modestly optimistic.
(27:15):
Expect to see some growth, particularlyfor the poor and average quality land.
I would say sort of guarded optimism.
They think prices will come up, butnot like it's gonna be gangbusters.
But I was also sort of relieved thatthey weren't predicting declines.
Often it seems like if you goback to the old reports, they
actually tend to expect declines.
(27:37):
A little more pessimistic audience.
Yeah.
They're still, they'rehigher than inflation.
Yes.
And so I think that's very importantto point out, and I think they're
very consistent with, again, that thishistorical averages, that we've seen over
a long period of time, that five to 5.5%.
Very consistent with that.
Now, a couple of the things that are inthe report here that would be of interest
to people, in areas that are transitioningout of agriculture, i.e. around Indy
(28:00):
and other large cities like that.
You've got some questions relatedto, transition values per acre and
you call this a development premium.
So talk a little bit about, what thatis in '25 and how that's changed.
It looks to me like this has changeda little bit, in the last few years.
Yeah.
So we asked specifically about the pricepaid per acre for land transitioning
(28:22):
out of agriculture into some other use.
Right.
We do tend to think about that in termsof like suburban development kind of
things, but it's not limited to that.
Post 2020, we saw an explosion inthe value of transitional land, and
a real demand for people, there wasall the story, new stories around
COVID of like people wanting to moveoutta the country, get away from
(28:42):
congested areas or whatever, right?
And then this year we actually sawa little bit of a decline, in what
we're seeing that transitional value.
But I often look at sort of, I callthe development premium 'cause I
look at how does that transitionalland compared to top quality land.
And as a rule of thumb, over thelast, you know, 15, 20 years, any
(29:04):
farmer will sort of sell theirland for twice the price, right?
Or twice the value theyget for agricultural.
And so that's sort of the, thepremium I kind of look at it.
What is that gap betweenthe transition and average?
And if you flip forward for thoseviewing, this actually tracks really
well with construction permits, right?
So this is Indiana State levelinformation on housing permits.
(29:26):
If you look in the 1990s, we hadvery high development premiums.
And we had a lot of construction.
And then it really slowed kindof around that housing crisis.
And actually in Indiana hit here alittle first that we had slow down.
And then it's been sortof gradually rebuilding.
That development premium basicallyfollows that lock step, as
(29:46):
construction slows down, there'sa lot less conversion of farmland.
And then as that starts to tick, tickback up, we start to see it come up.
In the last year they've both comedown a little but the overall trend
of the last 10 years is gradually up.
Now we always have a caution about,using values directly outta the report.
There's a lot of variabilityin farmland values.
There's particularly a lot ofvariability in transition values.
(30:10):
And so, yes, just to note that,I mean, when you have an average
around $27-28,000, I mean, there'sobviously tracks are gonna double that.
So there's a lot of noise there.
We're not trying to pick up all ofthat variability, we're just trying
to pick up, what does that look likecompared to, average and top farmland.
Yeah.
'cause I mean, transitionalland is almost like snowflakes.
Yeah.
Where they're like,each is sort of unique.
(30:30):
Yeah.
And every time I present thissomewhere, somebody's like, well,
do you know about this one here?
That this one?
Like, and I don't know aboutthat specific one, probably.
Right.
But generally, this is kind of themomentum or the trend that we're seeing.
Right.
Yeah.
So let's, summarize the informationin the report, and then we'll kind
of switch gears here a little bitand talk about, some more about
factors impacting land values.
(30:51):
So, I sort of put it here at the end'cause I feel like when you're writing
a land value report, you get almostevery year title it, new record high.
Yeah.
Tends to trend up.
But we used that again at the state level.
But the difference is what we're seeingis more of a diversion or compared
to the last several years betweenthe southern third of the state and
the northern two thirds, where wesaw a dip in decline in land values.
(31:14):
And depending on the quality grade,we're looking sort of across a big
area, I'm sure there are local marketsthat had even more extreme declines.
Or even some increases, right?
But generally that bottom thirdof the state has been declining.
And we see an increase across theother, two thirds of the state.
The key drivers, impacting the marketthis summer, and I think we'll have
(31:34):
to continue to think about them goinginto next year, are lower returns,
lower incomes, lower crop prices, andhow that's putting downward pressure.
And again, on the upward pressure.
A lot of it's still land conversion.
How much of, how much continueddevelopment are we gonna see,
going into the next couple years?
And generally, the respondents areoptimistic about prices or should say
(31:56):
they're expecting prices to increasethrough the remainder of the year, which
is, not rare, but, not the most common.
Right?
We have a sort of, it seems likepeople are always pessimistic about
the land market, but not this year.
Now for those of you that wannadig a little deeper, we're
gonna talk about some of the keyfactors impacting farmland values.
And so we're gonna go overthis, relatively fast, but there
(32:19):
are slides, related to those.
Again, for those that want to reallythink about what impacts farmland
values and when we talk aboutfundamentals, what are we talking
about, in terms of fundamentals?
And Todd, so let's just ask you thequestion, when we think about a simple
model of farmland prices, what arethe fundamentals that we think about?
So I usually, when I present thisto an audience, I put a little break
in here 'cause I tell 'em there'sgonna be some math on the next slide.
(32:42):
Uh, and so, uh, this, we may have justlost most of our audience here, but.
It's what we learn in Economics,Finance 101, net present value, right?
So the value of any asset that weown is based on how much we think
we can earn by having it, right.
So we think about the priceof farmland generally.
(33:04):
As a rule of thumb, we look at all of theways we could make money from farmland.
So we could cash rent it out, wecould farm it ourselves, we could
develop it into something else, right?
Those expected returns.
And then we discount those.
So we divide them by some discount rate.
And that's because we want moneynow, not in the future, right?
So we're worried the futuremight not happen, right?
And so anything that you're goingto pay me next year, I'm not gonna
(33:27):
put as much confidence in thatas what you'll pay me this year.
And I think if you think about just thosetwo factors that's what describes a lot of
the variation that we see in land prices,but it also describes when you go to like
an auction or people are talking aboutrecent sales, a lot of what the diversion
will be will really be like, oh, I thinkthis could be that expected return.
(33:51):
Or, or I think thediscount rate's different.
Or, yeah, or I think that expectedreturn could grow or I, you know,
if I manage this, I could getthose costs down or whatever.
It should be worth more.
Or they discount futurereturns differently.
And so I often use the analogy of like.
It's the difference between loaning moneyto my wife or loaning money to my kids.
So my teenage kids, I would'vea much higher discount rate in
terms of probability I'll actuallyget paid back in the future.
(34:12):
And one of the reasons why we'retalking about this is the discount
rate and the growth rate when youcombine those two is only about 2%.
2.2%. 2.1%, 2.2% in there.
That's called the capitalization rate.
Typically it's really low right now.
And what these slides, talk aboutis what would happen if that
capitalization rate increased?
If, and why would that increase?
(34:33):
Will the interest rates stay high?
There probably will be at least somewhatupward pressure on that discount
rate, slash capitalization rate.
These slides kind of look at howsensitive, land prices really are, to
increases in discount rate and increasesin decreases in expected returns.
One of the things you have here alsois looking at a farm income forecast.
This is, we could spend alot of time on this slide.
(34:56):
We're not going to, but for farm incomeis forecast to be quite high, in 2025.
One of the things that's gonna drive ushow much money we can expect to earn it.
Right.
So I look at the USDA farm incomeforecast, to give me an understanding of
like, where is the ag sector at large.
So if we're looking at particular countyin Indiana, it's much better to look
at like prices and yields in that area.
Yeah.
But if we're looking at sort ofnation as a whole, what I think is
(35:17):
gonna happen to land prices, thebest source of information is USDA.
And so they do a farm income forecast.
So they produce an estimate,what they call their estimate.
Or their official measure of net farmincome, which is sort of the value
that the agriculture sector generatesand, and a retained earnings, I guess.
Right.
And, and this is sort of a, likea system of national accounts, so
(35:39):
we've got all the different kinds ofagriculture and so we'll have places
where it's rising and falling differentcommodities, but this is sort of
what's the aggregate picture look like?
A year to put out afterthe year Indy close.
So we, we find out in August orSeptember how the previous year did,
so to provide more timely information,they forecast it several times a year.
Yeah.
And so there's a lot of stuffin the ag media, like when it
(36:02):
says like U SDA is forecastingfarm income to do this or that.
So I've been for a number ofyears just sort of tracking
how that forecast evolves.
And so they're saying for 2025, nowthis is based on the February forecast.
Yes.
They've got a new one coming out shortly.
In early September.
Yes.
So we'll, we'll seesome adjustment likely.
That's when we'll find outwhat actually happened in 2024.
(36:22):
Yeah.
When that September report comes out.
But generally over thelast 20 years, 25 years.
The aggregate number endsup actually coming in higher
than the initial forecast.
So they're saying they'reexpecting a profitable year.
There's a chance if the pattern holds.
They will actually come in alittle bit higher than that.
Weird to say this at this current time.
(36:42):
But I, you, you gotta remember, there'sa lot of different numbers that are
going into that net farm income forecast.
And, and, and here in here where we'rehere in a state where, where, crop income
is so critical, and two of the forecastin terms of Indiana, you gotta remember
the U.S. livestock is more important,relatively more important, particularly
as you get into the Great Plains.
(37:03):
And I'm hearing that the net farmincome ' 25 coming out in September
could be higher than the Februarynumber because livestock processes are
actually stronger than we thought theywere going to be early in the year.
And also, you go back to the revision ofthe safety net, that happened this summer.
The safety net paymentsare probably higher.
And you combine those things withrelatively low, crop returns and
(37:23):
you're still looking at a prettyhigh, net farm income forecast.
And historically that sort of, whatI call here the August, or it'll
be September this year, that numberactually in more years than not, is
more optimistic than we had in February.
Yeah.
Just a reminder that, youknow, obviously cash rents are
very important to land values.
We've talked about that before.
(37:44):
They were up slightly well in '25.
And cash rent is where I actuallythink of as like sort of a local
measure of potential return, right?
So the joke I always make, is that theeasiest way to make money for farmland
is just rent it to somebody else.
Have them do the hard work.
That sort of gives us kindof a baseline expectation of
what we think we could earn.
Even though in the net presentvalue model, it's expected returns.
(38:06):
A lot of us use cash rents as aproxy for expected returns, but
you could use expected returns fora specific farm, in that forecast.
Just be careful when you're doing that.
It's expected returns, not the returnyou had in '25 or '21 or some kind
of historical return like that.
The other thing that I just wanted tonote briefly is discount rates are higher.
Right now, we do expect a little bitof softening, perhaps coming here in
(38:29):
the next month or two, when the fed,talks about interest rates again.
They're up quite a bit from whatthey were, two, three years ago.
Yeah.
And I have, for those watching threedifferent discount rates here, right?
So the bottom is the Fed funds rate.
So that's what the Fed sets forthe overnight deposit rate, right?
So that's set by policy.
The prime rate is, generally whatbanks give for short run loans
(38:53):
to their best business customers.
And so that's sort of thedifference between the prime and
the Fed funds rate is kind of thebank's cost of doing business.
And that stays relatively stable.
And then the other one is the farmmortgage rate, which I got from the
Federal Reserve Bank of Chicago.
So that does include the northern twothirds of Indiana, but it also has
(39:14):
Southern Peninsula, Michigan, a littlebit of Wisconsin, all of Iowa and
northern two thirds of Illinois as well.
So it's a little, you know,kind of the corn belt area.
And I often look at sort of that, thedifference between the farm mortgage rate.
And the prime rate or thedifference between farm mortgage
rate and the Fed funds rate?
Yeah.
Because I have a lot of peoplethat will say to me like,
oh, the Fed's gonna do this.
What's that gonna do to the land market?
(39:35):
Those two things do move together,but it's not as lockstep.
Yes.
So we've seen, over the last, severalquarters where we see farm mortgage
rates coming down, we also have seen,the federal funds rate coming down.
When we see the farm federal funds rate.
Shift up.
We often see the foreign, but it'snot a one-to-one correspondence.
Right.
Yeah.
I don't think the Fed iscontrolling mortgage rates.
(39:57):
They're influencing it.
Yes.
Um, but the bank activity inthe, in the organic market is,
Part of it is the length of loan.
Tend to think that the primerate's more of a short term rate.
Yes, that's exactly.
It's more correlated with theoperating, interest rate and operating
interest rates do not necessarily,perfectly correlate with mortgage rates
because it's a different timeframe.
One's a year and one oncea much longer than that.
(40:18):
And so, you know, sometimeswe discount the future more.
Sometimes we don't.
So there could be differencesin those over time.
And we're kind of seeing that inthis chart here, for a period of
time there, quite a long periodof time there, the mortgage rate
was quite a bit above the prime.
Now it's pretty block step, since 2020.
Well, and the other one I think about,or I talk to my students about that.
(40:39):
I always say, if you tellabout the difference between
operating and real estate loans.
If somebody defaults on a farmmortgage, the bank owns a farm.
Yeah.
If somebody defaults on a, operatingloan, then maybe they get the
grain in storage or something.
Which would you rather have?
And we're at a case where, like rightnow we would rather have the mortgage.
So that's why we see the sort of thedownward pressure on those rates.
(41:00):
Good point.
Just a couple other thingshere to kind of wrap up.
I did wanna talk a littlebit about, rent ratios.
The capitalization rates we'vetalked, before is essentially
cash rent divided by land value.
If you look at the regional, landvalues, the capitalization rates from
two to 2.5, where the state average isabout, I think 2.1, 2.2, someplace in
(41:21):
there at the lower end of that range.
but the historical average is five.
All that means is there's been someperiods over the last 50, 60 years
where the capitalization rate wasconsiderably above, the two to 2.5.
So you always have to ask your question.
We're gonna revert back to themean, probably not anytime soon.
That's kind of what ourthought process is here.
What I've done here in the P/rentratio is, I've just inverted that.
(41:42):
So rather than doing cash rentdivided by farmland price, I do
farmland price divided by cash rent.
And this is analogous to the PE ratio,that's used to look at the stock market.
For example, right now,the PE ratio is around 35.
for the s and p 500.
and so that just give youa frame of reference there.
The historical p/rent ratio is 20.
'Cause you know, 5% inverted is 20.
(42:03):
But in 2025, it's 40 to 50, depending on,the region, of Indiana that you look at.
So it is high.
Uh, so the question naturally toask here, just like if we had a high
PE ratio, are we overvaluing land?
Well, the short answer is.
We don't think so.
We're overvaluing land, but I dowanna have a word of caution here.
If you have a relatively high, prent ratio, what does that imply
(42:27):
about the future earnings, forthat, investment in real estate?
And the way to think about this, if youhave a relatively high, farmland to rent
ratio, that means that the farmland wasrelatively expensive, compared to the cash
rent that could be generated from that.
And so you wonder, you ask yourself,could there be buyer's remorse?
I paid quite a bit for this land.
Maybe I paid a little too muchbased on the fundamentals.
(42:50):
Cash rent being the fundamental.
And so maybe my rate of return, will notbe real strong, in some of these years
where the p rent ratio was relativelyhigh or farmland prices increased
faster than cash rent, which was, inrecent years that has been the case.
And so I, I've got a chart of the,historical, P/rent ratio, you know,
just showing the average and, andwhere we've been at, since 1960.
(43:12):
Essentially from 1960 to 2004, 2005.
Right before RFS, we werebelow, the, the, the 20.
And then since therewe've been above the 20.
And really, Todd, that's, reflectingthe change in interest rates,
the capitalization rate's beenlower, in recent years compared
to what it was historically.
And so that's what that's illustrating.
And then I look at the negativerelationship between 10 year rate
(43:35):
of return and P/rent 10 ratio.
And so if the P/rent 10ratio is relatively high.
Meaning farmland price compared to the10 year average earnings is relatively
high, that implies that, perhaps therate of returns can be a little bit
lower, than it would've been if we'dhave bought land at a lower P/rent ratio.
And so I, I've got a slide thatillustrates that and sure enough.
(43:58):
If we look at the latest number in 2015,we were looking at a rate of return
there of 5%, which is a little bit lower,than the long run of rate of return.
it just implies that there is anegative relationship between these two.
So if you do buy at a higherP/rent 10 ratio, you do tend to
have a little bit lower return.
But this chart is looking at 10 yearrates of return going back to 1960.
(44:20):
That average slight negative to 20%.
That seems like a large range.
That's tiny compared to the stock market.
Okay?
And so just remember that when you'relooking at this chart, that yes, there is
a negative relationship between these two.
And if you do buy land when it'srelatively expensive compared
to cash rent, you would expecta slightly lower rate of return.
(44:40):
But quite frankly, even the 25,15 number 5%, it's not too bad.
You add cash rent to that and you'relooking at, you know, seven and half, 8%
return, for land in the last 10 years.
Not too bad.
I also encourage you to take a look atthe, relationship between the 20 year
rate of return, and the P rent 10 ratio.
And the reason why I really likethis chart, Todd, is the first time I
(45:02):
showed this to one of my colleagues.
They said, holy cow.
If you look at rates of return from 1960up to the current period, the most recent
being 2005, 'cause we had to have 20years of data, they range from six to 14%.
That's not too bad.
Again, compare that to the stock market.
Even six percent's the worst, interms of the 20 year rate of return.
(45:23):
And we had several years there where itwas over 10%, probably half the time,
the rate of return was over 10% andthat's before the cash rent's added.
And so what this clearly shows isthere's a negative relationship, but
also shows that land's had a prettygood rate of return, since 1960.
And so I encourage you to takea look at the report, look at
the cash rents and land values.
(45:43):
It looks at rates of return offarmland compared to other assets.
And then take a look at, these P/rentratios, and, read through that.
A lot of good informationin that August PAER report.
So thanks for joining us.
Just a reminder that there is a separate,podcast for cash rent, so we also
encourage you to listen to that podcast.
Thank you.
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