Minding Ag's Business

What Really Moves Farmland Values

By Marcia Zarley Taylor , DTN Executive Editor
Crop insurance payments have been too small to trigger monumental swings in farm income and land values this past decade, economists argue.

Recently, some readers of my blog have blamed crop insurance as the prime culprit for artificially boosting farmland values. They disagreed with my argument that farm profits--and farmers' universal desire to own the earth they operate--have been the main accelerator. Just to be sure, I went back to college for a second opinion.

For the record, Purdue University Economist Brent Gloy, director of the Center for Commercial Agriculture, tells me that those who blame crop insurance for inflating land markets are "flat out wrong."

Iowa land values have rocketed from about $2,000 to an amazing $8,000 per acre just since 2000, Gloy notes. Considering the state possesses 30 million acres of farmland, that's a transfer of $180 billion in paper wealth in 12 years. That's unprecedented and nearly unbelievable, especially when states like Illinois, Nebraska, North and South Dakota, Minnesota, Wisconsin, Michigan, Ohio and Indiana have notched similar windfalls.

The small contributions crop insurance has made to farm incomes over this period pale next to the real market drivers, he stressed. First, the Renewable Fuel Standard, which ignited demand for corn-based ethanol, required the equivalent of 26.4 million acres of US corn last year, Purdue Economist Chris Hurt says. China's appetite for soybean imports required the equivalent of another 21 million acres of production. The Federal Reserve's policy of near-zero interest rates only compounded those massive demand shifts.

"There's no way crop insurance added all that wealth to land values. It doesn't even pass the laugh test," Gloy says. It's demand--especially inelastic demand for commodities combined with three subpar crops--that underpins commodity incomes and funds our current real estate mania.

Crop insurance stabilized farm incomes after the nation's flash drought in 2012, but its long-term contribution to farm incomes in corn states have been largely negligible, according to Carl Zulauf, an economist at the Ohio State University. In a recent post on farmdocdaily, Zulauf notes that net crop insurance payments (claims minus premiums) represented just 1% of gross soybean income from 2003-2012 and 3% of corn income. That's not enough to move the needle roughly 200% or 300% in states like Iowa and Illinois.

Gloy adds that crop insurance could potentially distort some markets by encouraging corn production on marginal ground in high-riskregions like parts of the Dakotas or dryland corn in the Mississippi Delta. I see that as an actuarial problem though, with increased vigilance so premiums reflect the risk the government and insurance companies are assuming.

After all, it should be no different than taking out a homeowner's policy from insurers who have implemented new guidelines after Hurricane Sandy: If you live on Long Island, it now costs about $4,000 a year to insure a $700,000 house, versus about $1,800 if that house were 50 miles inland. What's more, private insurers don't pay a dime on the first $14,000 wind loss in a hurricane. Some insurance companies now decline to insure homes built on sand dunes at all. That just means only the wealthy can afford such oceanfront properties.

Growers in the Dakotas, for example, already pay stiffer premiums than their neighbors in Iowa, but its worth making sure those rates are actuarily sound.

I'm not saying crop insurance is perfect and should be exempt from reforms. I'm just saying, it's not the major factor behind farmland inflation. I may not be able to persuade my harshest critics, but Brent Gloy says I'd pass his economics class on this.

As a reminder, keep your language clean, all your comments on topic, don't make personal attacks and don't self-promote.

Follow me on Twitter@MarciaZTaylor

(SK)

Comments

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H. Clay Daulton 6/20/2013 | 10:49 PM CDT
And not a word about ethanol taking up the formerly overproduced corn.
Bonnie Dukowitz 5/1/2013 | 9:53 PM CDT
Not only what you mention, Aaron. How about government grants, direct and indirect. Might make crop insurance look like a pimple on a hippos' backside.
Aaron Cross 5/1/2013 | 2:16 PM CDT
Marcia, I would like to see you do an article on EWG. Their rise in political power by use of tax exemption and lobbying, their ridiculous claims against cattle producers, and all farmers that are not organic, etc. I know Urban has touched on some of these, but maybe it's time for the people to see exactly how radical EWG is. You could also tie in that one of the founders of EWG's wives is closely tied with Al Gore and Walter Mondale. Just a thought.
Brandon Butler 5/1/2013 | 2:14 PM CDT
I don't know why this is such a shock and an outrage to people. Payments in bad times AND GOOD times? You have a whole economic system in the United States that is screwed up that way, one that people (falsely) call Keynesian economics. I hear people bit*h about how the Keynesian system doesn't work. How can that be said? IT HAS NEVER BEEN TRIED. The next time we pay down the federal debt during good times instead of inventing new ways to waste...errrrrrr develop helpful federal programs will be the first time.
Roger Cooper 5/1/2013 | 8:26 AM CDT
About a third of my normal corn production was considered a loss this past year (didn't have any coverage back in 1988). This 2012 coverage cost over $20K in premiums. How about a refund for all those other years when there was no loss? (who subsidized who?)

Land debt? FCS will only loan you $6K/acre in my area if I qualify. Anything over that you need to come up with on your own! I also have heard of people over 80 years of age who wrote a thing called a "check" for 370 acres at $12K+/acre. It's called cash! Good for them!

Skin in the game? If you don't have any in ag ------ do'nt cry out loud with your mouth full of cheap and plentiful food!

Plentiful? Oh by the way ---- my local elevator has no soybeans for sale at any price currently and most of the corn bins in the area have bin empty since the previous marketing year! Good luck to the end user not covered to harvest time (nothing planted here yet)!
Marcia Taylor 4/30/2013 | 11:59 AM CDT
Dear Unknown: The Peace of Mind dividend exists, but Brent Gloy added that would seem to help aggressive cash renters more than land buyers. Afterall, crop insurance guarantees can vary widely from year to year (as our Canadian friends point out), so it's hard to insure a profit for the life of your farm real estate loan. Thanks everyone for your comments and phone messages--now I am off to do a little research on a topic that has nothing to do with crop insurance for a change.
Unknown 4/30/2013 | 10:26 AM CDT
With 40+ years of farming experience, I believe that 'academics' have discounted the value of the 'peace of mind' that crop insurance gives. After getting almost zero crop in 76' and 88' with no crop insurance and each time taking three years to get out of debt, if that happens with today's expenses you can't afford not to have insurance coverage. 'Peace of mind' allows farmers to bid that extra money for rent or ownership of land knowing that they are guaranteed a certain level of income. Income to rent or buy land that doesn't have to go for prior debt service. So, the actual dollars of crop insurance payments towards income may be low but the 'peace of mind' is PRICELESS !!!!! As others have commented, with the crop insurance safety net, there's little skin in the game these days, allowing for the overbidding of rents and land purchases. But everything has a cycle and this cycle will eventually change as they always do.
Bruce Neufeldt 4/30/2013 | 10:26 AM CDT
I enjoy your column Marcia. Keep it coming.
Timothy Gieseke 4/30/2013 | 9:59 AM CDT
I think Gloy's laugh-test comment is short-sighted. Farming is a risk-management business and when that risk is comfortably covered it allows "irrational exuberance" to occur. Granted, there are many other major factors that have given rise to crops and land, but covering risk can act as a catalyst - a little bit can have a big effect.
DAYTON FUNK 4/30/2013 | 9:44 AM CDT
Marcia, I should have written prior to 2013 the farm program offered in Canada was govt. guaranteed and Bankable. Today it is not which will send shivers through the farm lending sector and soon reflect in land prices. Knock 25% off the value of corn and see what happens down there. There are few farmers and investors who will work to subsidize an industry so it's just a matter of time and everything will correct itself.
Personally I think Quantitative Easing is playing a bigger part than we know regarding commodity prices and true value of the USD. Once inflation takes hold commodity prices will increase along with interest rates. I see farmland stabilizing and dropping back a couple of notches before moving up again. But I'm just a dumb farmer what do I know.
Matthew Schreurs 4/30/2013 | 9:35 AM CDT
I kind of second Bill's comment, in the fact it isn't so much that crop insurance is making the farmers money. It is the unconditional, artificial floor that crop insurance puts on farmers income levels. There is little "exposed" risk for many farmers in America that solely crop farm and with little skin in the game, they can bid up land values to put more skin at risk. Two to 3 years of $4 corn will cure a lot of $10k land. Remember, it isn't so much how much someone paid for it as it is how are they going to pay for it.
Bonnie Dukowitz 4/30/2013 | 9:26 AM CDT
Burst bubbles have occured more than once. Some were quite severe. Take a look at the old atlases to see how many properties had been repossessed by the Land Banks, State and National Banks. I am not defending bigger government, nor do I think Marcia is. The truth is, land bubbles were very real and problematic long before crop insurance. The legal entries on an abstract in our possession show this land sold in 1925 for 5 times the amount it sold for in 1960.
DAYTON FUNK 4/30/2013 | 9:11 AM CDT
Marcia, I think your missing the point. No one is saying crop insurance alone will cause the land prices to go up. Obviously there are other factors. We have crop insurance up here in Canada. Most didn't even take it because the coverage is too low. They in fact only took out Agristability a guarantee on Net Income a program similar to your GRIP. Our farm was guaranteed $100 per qualifying acre in 2003 then $200 in 2008 and now it's around $400 after allowable expenses. Our farm is small around 1500 acres but some are well over 25,000 so they can now afford to buy a lot of land. Here farmers were buying land at double the value paid 5 years ago because the govt. backed there income. Now comes 2013, a new farm program Agristability has been revamped to Growing Forward II and will not cover the Net income only 70% of eligible input expenses. You must remember that when the program first came out it was to stabilize income at $50 per acre not $400. You see farmers forget that the govt. should follow a budget but farmers thought this govt. gravy train would never end. Everything will be fine if commodity's don't fall dramatically, there are no unforeseen disasters and interest rates don't rise too fast. Oh, and land prices this spring are much different than last fall. Most have already dropped to 1 year ago levels here and no one is as excited to purchase more, wonder why?
Jarrod Bennett 4/30/2013 | 9:03 AM CDT
Great article Marcia. Thanks for sharing. Favorite quote, "It doesn't even pass the laugh test" :)
Bill Billson 4/30/2013 | 8:02 AM CDT
I dont think Gloy understands the issue. No one is saying that crop insurance is a large part of farmers net income. The main issue is that crop insurance guarantees a profit on your entire land base giving farmers the ability to overextend to bid an extra 5000 an acre. If farmers had any skin in the game land prices would be halved.

There is also a snowball affect. If you 20 years without a loss how much cash are you gonna have burning a hole in your pocket? There are only so many corvettes, vacation homes and trips you can buy. Check the UMN FINBIN data Marcia. The data is the best in the biz and you will be saddened to see how much money wage earners like you are spending on taxes to ensure farmers can buy vettes and vacation homes.
Aaron Cross 4/29/2013 | 11:20 PM CDT
Thanks for the wonderful article, glad to see you set the record straight. Right on Bonnie!
Bonnie Dukowitz 4/29/2013 | 8:38 PM CDT
Thanks for the article, Marcia. But then what do facts mean when compared to uninformed, coffee shop opinion?
You must be a glutton for punishment.