**Disclosure: I’m not an economist, appraiser, real estate agent, big time investor or super smart crystal ball reader. I’m interested in land values as they impact my customers’ cash flow, balance sheet and risk management needs. I’m also interested as land values and rents impact my cash flow, balance sheet and risk management needs...
These numbers are pulled from the University of Nebraska Real Estate Report using numbers for Southwest Nebraska. As real estate values are localized to a field level, consider these numbers generalizations. Numbers date back to 1981.
-The relationship of rent to the value of land is at a 30 year low. This makes some sense due to low interest rates which result in low borrowing costs as well as low competitive returns on secure investments at the bank. (Savings accounts, CDs, etc.)
-The amount of rent paid relative to gross farm revenue dipped during the boom from 2006 - 2012. The correction is in full swing. Something has to give. We either need a recovery in commodity prices, 400 bushel corn or an adjustment in land values and rents.
Using 30 year averages and assuming $3.50 corn, irrigated cropland in Southwest Nebraska needs to dip 55%. This does not reflect interest rates that are at all time lows so I don’t expect a 55% dip in land prices. 20%? 30%? Absolutely.
Rent has to dip as well. Land owners are going to balk as taxes in 2015 are 180% higher than 2008. However, while rent to revenue ratios are not historically ugly, they don’t reflect increased production costs including fertilizer, equipment, chemical, seed, etc. Something has to give. If it’s not production costs, it will be rent.
