Has the Bubble Burst on Farmland Prices?

In 1970, average farmland prices in Michigan were $1,000 per acre. Forty years later, in 2010, average farmland prices were $5,000 per acre. During four decades, the price climbed about 10 percent every 10 years. However, in 2013, average farmland prices in Michigan reached $7,500, a change of 15 percent to 20 percent during a three-year period.

"Has the bubble burst? Have we sunk the ship already?" questioned Dennis Stein, Saginaw Valley district farm management educator for Michigan State University Extension during the Growing Michigan Agriculture Conference in March.

"Our land generates dividends, and some of that increased price pressure can be attributed to outside investors," he said. "Livestock operations, especially several large operations in a small geographical area can also drive up land prices as they compete for space to spread manure."

Purchasing land at $4,000 per acre at 5 percent interest requires a $321 per acre annual payment.

"In high production areas with top notch soils, that payment is viable for the long term," Stein said. "But marginal or lower producing soils cannot sustain that type of payment in the long run.

"In other words, if you are paying $8,000 to $12,000 per acre for land, you are probably paying too much."

From 2008-2013, farmers enjoyed strong commodity prices with the opportunity to catch up on improvements like drainage, irrigation, equipment upgrades and buildings. Livestock price trends appear favorable for the future and crop yields trends and milk production per cow continue to move upward. However, he noted that large margins on commodity crops that producers enjoyed for several years are probably dried up for the foreseeable future, challenging producers to make investment decisions based on providing a sustainable return.

"When you are at the top, you have a much higher chance of prices going down," he said.

For example, investing $500-$800 per acre in drainage tile should improve yield by 10 to 15 bushels per acre and the return should be calculated using a value no greater than $5 per bushel for corn. An irrigation system investment requires $2,000-$5,000 per acre and could provide an additional 30-70 bushels per acre, or $150-$375 per acre.

In 2012, the closeout profit per acre on corn was around $350 per acre. Expectations are lower for 2014, and Stein predicts profits for corn to close out at around $30-50 per acre.

"That means some of the fluff needs to go and go quickly," Stein said.