MONROE - Farmland remains a good investment, but farmers are having to keep a close eye on variable costs when renting.
With farmland appreciating at the rate of about 6-7 percent a year, Dr. Bruce L. Jones at the Department of Agriculture and Applied Economics at the University of Wisconsin-Madison believes farmland is as good as many investment portfolios.
Land is assessed for tax purposes by the price of corn, and that has risen, boosted by the demand for ethanol and corn syrup.
Since about 1982, Wisconsin land prices almost doubled, which mirrors the national average, Jones said.
But Wisconsin farmland prices went off trend at a greater rate compared to other states in 1998 or 1999. Neighboring states have gone off trend only in the past two years.
Jones gave three explanations for Wisconsin land going off track so early.
First is the modernization and improvements in dairies in the early 1990s. In their need for access to more land for nutrient management, farmers were willing to pay "too much" for land, Jones said.
The increased use for land for recreation and residences also drove up prices. And as farmers sought to reinvest profits in good farmland, the competition between farmers for dwindling available farmland also increased.
In 1999, the switch to assessments based on "use value," or the income potential, caused taxes on farm land to go down. Farmers then reinvested their tax savings back into land.
Jones expects these economic pressures to continue, except for the recent housing slump. As energy prices increase and the desire to commute decreases, housing starts may not climb again for a while. But the pressures from expanding dairies will remain.
According to the U.S. Census of Agriculture, between 1997 and 2002, the U.S. has annually lost about one-half percent of its cropland. That number is about the same for Wisconsin. But for other farmland, Wisconsin is losing .86 percent annually, compared to the national average of .2 percent.
Jones said land prices went off track in the 1970s, but a correction in the market in the 1980s returned them to the national trend. The 1970s bump in prices was brought on by "lots of borrowing," Jones said.
"Today we don't have that much borrowing. Farmers put down more cash, are more disciplined and are using good financial sense," he said.
Farmers in Wisconsin own about 72 percent of the farmland, which is higher than the national average of 62 percent. Illinois and Iowa are only about 42 and 49 percent, respectively.
"Wisconsin farmers can expand in acres or cows, and are not as dependent on land," Jones said.
But when the need for more land arrives, farmers have paid an average of 22 percent of their gross receipts from corn for cash rent, as compared to 36 percent in Illinois and 39 percent in Iowa.
Right now, cash rent is at 2 percent of land value.
"It needs to go up to 4 percent to be competitive to other investments," Jones said.
When rent is too high, "farmers are better off to buy land and capture the appreciation," he said. "The returns on investment isn't always about the cash flow, but the capital gains."
When considering renting as an option, farmers are keeping close tabs not only on the price of their crops, but also on the increasing fuel prices and the falling value of the dollar on the foreign exchange. Increasing prices of chemicals, fertilizer and seed all take a chunk out of the profit margins.
Jones cautioned farmers about the value of their labor and capital. When trying to expand, he said it's tempting for a farmer to cut into his own labor value.
"Farmers need to give themselves a fair return. You shouldn't be working for nothing," he said. "Don't let emotions get ahead of good economic sense."
With farmland appreciating at the rate of about 6-7 percent a year, Dr. Bruce L. Jones at the Department of Agriculture and Applied Economics at the University of Wisconsin-Madison believes farmland is as good as many investment portfolios.
Land is assessed for tax purposes by the price of corn, and that has risen, boosted by the demand for ethanol and corn syrup.
Since about 1982, Wisconsin land prices almost doubled, which mirrors the national average, Jones said.
But Wisconsin farmland prices went off trend at a greater rate compared to other states in 1998 or 1999. Neighboring states have gone off trend only in the past two years.
Jones gave three explanations for Wisconsin land going off track so early.
First is the modernization and improvements in dairies in the early 1990s. In their need for access to more land for nutrient management, farmers were willing to pay "too much" for land, Jones said.
The increased use for land for recreation and residences also drove up prices. And as farmers sought to reinvest profits in good farmland, the competition between farmers for dwindling available farmland also increased.
In 1999, the switch to assessments based on "use value," or the income potential, caused taxes on farm land to go down. Farmers then reinvested their tax savings back into land.
Jones expects these economic pressures to continue, except for the recent housing slump. As energy prices increase and the desire to commute decreases, housing starts may not climb again for a while. But the pressures from expanding dairies will remain.
According to the U.S. Census of Agriculture, between 1997 and 2002, the U.S. has annually lost about one-half percent of its cropland. That number is about the same for Wisconsin. But for other farmland, Wisconsin is losing .86 percent annually, compared to the national average of .2 percent.
Jones said land prices went off track in the 1970s, but a correction in the market in the 1980s returned them to the national trend. The 1970s bump in prices was brought on by "lots of borrowing," Jones said.
"Today we don't have that much borrowing. Farmers put down more cash, are more disciplined and are using good financial sense," he said.
Farmers in Wisconsin own about 72 percent of the farmland, which is higher than the national average of 62 percent. Illinois and Iowa are only about 42 and 49 percent, respectively.
"Wisconsin farmers can expand in acres or cows, and are not as dependent on land," Jones said.
But when the need for more land arrives, farmers have paid an average of 22 percent of their gross receipts from corn for cash rent, as compared to 36 percent in Illinois and 39 percent in Iowa.
Right now, cash rent is at 2 percent of land value.
"It needs to go up to 4 percent to be competitive to other investments," Jones said.
When rent is too high, "farmers are better off to buy land and capture the appreciation," he said. "The returns on investment isn't always about the cash flow, but the capital gains."
When considering renting as an option, farmers are keeping close tabs not only on the price of their crops, but also on the increasing fuel prices and the falling value of the dollar on the foreign exchange. Increasing prices of chemicals, fertilizer and seed all take a chunk out of the profit margins.
Jones cautioned farmers about the value of their labor and capital. When trying to expand, he said it's tempting for a farmer to cut into his own labor value.
"Farmers need to give themselves a fair return. You shouldn't be working for nothing," he said. "Don't let emotions get ahead of good economic sense."