Farmland Values

Here's some math for ya......was reading Oldandnews last post and it jogged a business discussion I had with a buddy who was planning to sell his business some day and i asked how you determine what it is worth.

He said you take what the gross revenue is for 5 years and that is the price (roughly). Soo if your cashflow is $100K/year the business is worth $500K. Assumption here is someboady could take out a mortgage and pay it off in 5 years and then enjoy the $100K income.

Let's apply that to a section of group in Iowa that yields 200 bushel corn at $5/bushel. That's $640K/year in gross revenue. Multiply times 5 and that is $3.2M. Divide that by 640 acres and that is $5000/acre. Keep in mind that don't factor in inputs on your net pay.

5% interest on $3.2M is $160K.
 
Operating notes are not tied to net worth as much as they are tied to crop insurance. Usually crop insurance is what is used to secure an operating note. Subsidized crop insurance which the last few years has been insuring a profit if ended, would affect land prices as much as commodity prices going down. I don't think a lot of people realize how much net profit some of this land has generated the last 5 years. On my farm I have made as much the last five years as the previous 15 combined. It has been this way pretty much across the whole country. It doesn't look any different for next year. This is what is driving land prices so high, that cash is being used to buy land. Where else would be a good place to put it. 10k land rented out for 350 and acre is a 3.5 percent return before property taxes. After taxes would be around 3 percent. That is a better return than most investment presently. Everybody knows it won't go up forever, but it will get higher than the high that will be set again, it always has.
 
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Wirehairs
Wow.....those prices are crazy to say the least.
 
fsentkilr said:
Operating notes are not tied to net worth as much as they are tied to crop insurance. Usually crop insurance is what is used to secure an operating note. Subsidized crop insurance which the last few years has been insuring a profit if ended, would affect land prices as much as commodity prices going down. I don't think a lot of people realize how much net profit some of this land has generated the last 5 years. On my farm I have made as much the last five years as the previous 15 combined. It has been this way pretty much across the whole country. It doesn't look any different for next year. This is what is driving land prices so high, that cash is being used to buy land. Where else would be a good place to put it. 10k land rented out for 350 and acre is a 3.5 percent return before property taxes. After taxes would be around 3 percent. That is a better return than most investment presently. Everybody knows it won't go up forever, but it will get higher than the high that will be set again, it always has.
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I am forced to use net worth as an expression of debt coverage daily in credit decisions for ag operators. In my experience crop insurance barely covers the input costs, and as an aside, amounts to one of the great schemes or rackets of all time, to the detriment of the producer.
 
UGUIDE said:
Here's some math for ya......was reading Oldandnews last post and it jogged a business discussion I had with a buddy who was planning to sell his business some day and i asked how you determine what it is worth.

He said you take what the gross revenue is for 5 years and that is the price (roughly). Soo if your cashflow is $100K/year the business is worth $500K. Assumption here is someboady could take out a mortgage and pay it off in 5 years and then enjoy the $100K income.

Let's apply that to a section of group in Iowa that yields 200 bushel corn at $5/bushel. That's $640K/year in gross revenue. Multiply times 5 and that is $3.2M. Divide that by 640 acres and that is $5000/acre. Keep in mind that don't factor in inputs on your net pay.

5% interest on $3.2M is $160K.
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If I use an appraiser who is using todays commodity prices to project out 5 years or farther, to justify the value of ground beyond the long term historic earnings potential, I and the appraiser would be measured for the looney bin or a jail cell, because I'm/ he are either insane or criminally reckless. A better indicator is the $1.80-3.30 corn of a short 3.5 years ago.... and I might add basically the same price adjusted for inflation pretty much since 1946. We aren't very far removed from LDP's, think it can't happen again? How much 5000-10000 per acre farmground do you want to be holding when it cycles back? At todays values, the big boys, insurance companies, international ag banks, are using a margin of 2.50-3.00 percent over cost of funds, and an LTV of 60% to provide a cushion for the expected correction, in values and interest rates. Local banks are somewhat more agressive, in LTV, but not in rate, and are reluctant to do long term financing, preferring to do 1 to 5 year deals, which can be rewritten or called if the market changes, or they roll out of the wrong side of the bed, and panic over their exposure.
 
As high as the base prices have been set for crops for crop insurance the last few years, if a farmer is spending more than they are insured for on inputs they aren't going to be around long. I'm not a big fan of crop insurance either, but without subsidized crop insurance, these high rents and high land prices wouldn't be happening especially in fringe areas of the cornbelt.
 
fsentkilr said:
As high as the base prices have been set for crops for crop insurance the last few years, if a farmer is spending more than they are insured for on inputs they aren't going to be around long. I'm not a big fan of crop insurance either, but without subsidized crop insurance, these high rents and high land prices wouldn't be happening especially in fringe areas of the cornbelt.
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You answered the question yourself. it's an artificially supported value, and is not sustainable, without subsidy, in an open marketplace. Are we doing anybody a favor?
 
I'm not sure it couldn't survive without being subsidized, it would just cost twice as much. Actually it might not go up as much as the subsidy, because it would be more efficient if it were run by private companies. Hail insurance is a good example, it is run by private companies without RMA.
 
oldandnew said:
A better indicator is the $1.80-3.30 corn of a short 3.5 years ago.... and I might add basically the same price adjusted for inflation pretty much since 1946.
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I would agree with the first part on prices but I am confused on you adjusted for inflation comment.
According to the inflation calculator http://www.westegg.com/inflation/ a $1.40(Roughly what corn was worth in 1970) is equal to $7.77 in 2010, that same $1.40 in 1946 would be worth $15.46 in 2010.
I would say a bushel of corn buys a lot less than it did in 1946.
 
fsentkilr said:
I'm not sure it couldn't survive without being subsidized, it would just cost twice as much. Actually it might not go up as much as the subsidy, because it would be more efficient if it were run by private companies. Hail insurance is a good example, it is run by private companies without RMA.
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I don't begrudge anybody doing what's ethical, and legal, to make an enterprise work. I would encourage and expect it! We are a government system ripe with inconsistencies and confusion as to it goals. My only point is the nature of all things is to return to balance, and systems set up to fight against the balance inevitably fail. Ethanol from current corn production is a good example, it's highly subsidized, less efficient, highly evaporative so it wreaks havoc on air quality standards, and uses and despoils water at a frightening pace. It doen't work in the current model. On the other hand, Brazil, operating with sugar cane instead of corn, because of the huge yield from cane at low input energy, in some cases hand presses and open fire cookers, it does work. Thanks to sugar cane Brazil is energy self sufficient. Rather than go all out to find or develop our "cane" crop, whatever it may be, we are hopelessly locked into the failed model, due to lobbiest for the corn industry, political insiders with ownership in ethanol plants, mandates for use by misguided state legislatures, and last but not least feeding detrimental distillers grains to everything from dairy cattle to chickens and fish.
 
oldandnew said:
Thanks to sugar cane Brazil is energy self sufficient. Rather than go all out to find or develop our "cane" crop, whatever it may be, we are hopelessly locked into the failed model.
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We might actually be in agreement on something.
 
moellermd said:
We might actually be in agreement on something.
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Careful we wouldn't want to go to far! Remember the story about the two showbiz partners who were moderately talented, but were famous because they fought over everything? I have 14 year old twin girls, so it's a position I can relate to. My favorite story is going down the road when they were younger with their much younger sister in a car seat that I couldn't see from the drivers seat, I asked the twins next to her in the back seat, if she were awake or asleep? One said yes the other no! An arguement ensued.
 
Regarding some of the cash rent values- I live on the border of Logan and McLean co. IL, both of which fell on the top of the list for land value (~$230) and have actually had a little luck with pheasant in certain pockets. CRP and other grassland is few and far between, but private land still holds a few.

On a side note- I was shooting trap at the Leroy gun club which borders a state park and 2 roosters flew right in front of the trap house and landed about 30 yards out :eek: We were in the middle of the round when they came flying in... across the road and towards the shot. Those have to be the 2 dumbest roosters I've ever seen.
 
Good thread, Good discussion, good points and I'm not adding anything to this but I'm not paying that much per acre or section. This boom will become bust. Cycles it will crash and land will be Cheaper. Your argument about crow insurance and the rest is a mute point. It is about how much you can produce per acre and how much you can sell it for. Everything else is just a waste of time. If you have nine sections and it is all in corn right now, you are living high on the hog. If you have 240 acres and you are raising corn and selling it for ethanol, you are living pretty good. If you have 240 acres and you are buying land at the prices discussed on this thread, you are a fool in my opinion. It is all cylical. Gentlemen, if you are paying more to acquire land and expecting the same speculation for crops, you might want to think again. That is my humble opinion and good luck to you.
 
Like others have said, its all a cycle. Someday, hopefully soon, land prices will tank and the common man will be able to afford to maybe buy some land.
 
jmac said:
Good thread, Good discussion, good points and I'm not adding anything to this but I'm not paying that much per acre or section. This boom will become bust. Cycles it will crash and land will be Cheaper. Your argument about crow insurance and the rest is a mute point. It is about how much you can produce per acre and how much you can sell it for. Everything else is just a waste of time. If you have nine sections and it is all in corn right now, you are living high on the hog. If you have 240 acres and you are raising corn and selling it for ethanol, you are living pretty good. If you have 240 acres and you are buying land at the prices discussed on this thread, you are a fool in my opinion. It is all cylical. Gentlemen, if you are paying more to acquire land and expecting the same speculation for crops, you might want to think again. That is my humble opinion and good luck to you.
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jmac, I can't disagree that the trend feels like a bust coming on but they were saying that 10 years ago when i bought my land for a third of what it is selling for now and they thought it was ridiculous then. As a beginning farmer I am faced with some of the issues you refer to about selling grain. Whether it gets sold for ethanol or at whatever market makes no differences to me. It will get sold at market price depending on how good of job I do marketing it. If you don't live near an ethanol plant you are probably not selling corn directly for ethanol. As far as crop insurance goes it looks like I can get insured for 59 bushels and acre since I have no proven yield. The price is set around march first and i am thinking it might come in somewhere around $6.00. I am on a thrid share and so if you take out price of crop insurance, fert and herb payed at 1/3 my costs I would be lucky to equal what i am getting in cash rent now.
 
jaytee said:
Like others have said, its all a cycle. Someday, hopefully soon, land prices will tank and the common man will be able to afford to maybe buy some land.
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How far do land prices need to fall so that the common man will be able to afford to maybe buy some land?
 
haymaker said:
How far do land prices need to fall so that the common man will be able to afford to maybe buy some land?
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A HELL of a lot less then 10 grand per acre. 2 to 3 sounds about right and as far as I'm concerned it cant come soon enough.
 
jaytee said:
A HELL of a lot less then 10 grand per acre. 2 to 3 sounds about right and as far as I'm concerned it cant come soon enough.
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Two to three grand isn't a bust it's a correction. Last time it went to 200.00 or bring a chicken. Don't think it can go that bad again, but from where we are 1500 an acre or less, might seem like it, and is possible. It will depend solely upon what the ground can earn, in a revalued environment. I think it's a poor time to be long in the market on 3000-10000 per acre farmground.
 
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