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Bruce Jones: Farm land prices continue to climb

[audio:http://news.cals.wisc.edu/wp-content/uploads/2011/03/bruce_jones_2011_land_values.mp3|titles=Bruce Jones on farm land prices]

Transcript:

Sevie Kenyon

Farmland Values Continue Their Ascent.  We’re visiting today with Bruce Jones, Department of Agricultural and Applied Economics, University of Wisconsin Extension and the College of Agricultural and Life Sciences, Madison Wisconsin.  I’m Sevie Kenyon.  Bruce, Welcome to our microphone.  Give us a thumbnail sketch of farmland values across the country.

Bruce Jones

Generally everything is up on the strength of commodity prices, the returns to farming have been up.  Those higher returns are translating into higher bid prices for farmland so, as the returns have increased, we’ve had a corresponding increase in the value of farmland pretty much across the states.

Sevie Kenyon

Bruce, can you tell us, is this a bubble?

Bruce Jones

Well let’s start with what a bubble is: A bubble is a speculation of asset values that aren’t sustainable.  Basically you get economic factors.  With respect to the farmland market, no. We have the fundamentals in place that would support this increase.  There are higher commodity prices, which are higher returns – that will help boost the value of farmland.  On top of that, real interest rates have been on the decline.  I don’t think that we’re looking at a bubble.

Sevie Kenyon

Bruce, are there some risks in the current situation?

Bruce Jones

Interest rates are one big issue that I guess I would worry about.  They’re about as low as you would expect them to be, so they’re going to start rising.  As the interest rates start rising that will put downward pressures on land prices.  As the economy rebounds, and we hope it will soon, interest rates should rise and that will put some downward pressures on farmland values.  The other big question is how strong are commodity prices going to stay?  If they continue to stay at current level, there is going to be support for farmland values.  If they start seeing some slippage, we would start seeing some decline in those prices, which would translate into lower returns.  There could be a downward adjustment in land prices.

Sevie Kenyon

Bruce, if you go ahead and make the decision to buy farmland at this time, what comes next?

Bruce Jones

If I’ve taken the plunge and bought the land, I certainly can’t afford to take a hit on production because of a drought.  I’m much more inclined to buy crop insurance to protect me returns on my production, same thing with prices.  If the market offers me a price that I know I can get a profit and lay off some risk. I might be inclined to hedge or use options to take care of some price risk. I would also perhaps say alright, I’ve taken off a big financial chunk in terms of buying the land, I kind of planned on replacing machinery in the next year or two. I might push that back a couple of years or so because I just don’t want to take on any more debt at this time.  Once things settle down and I’ve got my balance sheet healed, I’ve got my cash flow in pretty good shape, then I might go on with some new projects.  But basically once I’ve committed a lot of money to the land purchase I’m going to have to make some adjustments in terms of controlling some risks to make sure that that land purchase doesn’t take me under.

Sevie Kenyon

We’ve been visiting with Bruce Jones, Department of Agricultural and Applied Economics, University of Wisconsin Extension and the College of Agricultural and Life Sciences, Madison Wisconsin, and I am Sevie Kenyon.