Monday, January 28, 2013

Kansas: Farmland Values May be Higher Than Traditional Surveys Show

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A new Kansas State University study indicates that using sales transaction data in determining the value of Kansas farmland shows a higher – in some cases significantly higher – value for the land than the traditional survey method derived from producer estimates of farmland value.

“The current growth in land values and the many businesses and personal decisions affected by these values warranted more extensive analysis to obtain estimates that were less aggregated than either the state or crop reporting district-level values that were available,” said K-State Research and Extension agricultural economist Mykel Taylor. “For this study, we obtained sales transaction data from the Kansas Property Valuation Department, which reflect agricultural land sales in Kansas.”

A paper outlining the study is available online here.

Taylor, along with K-State agricultural economist Kevin Dhuyvetter, embarked on the study in part because state budget cuts in 2009 forced changes in the way land values are reported in Kansas. Prior to 2009, the Kansas Agricultural Statistics Service conducted farmer surveys which allowed land values to be reported at the crop reporting district (CRD) level. There are nine such districts in the state.

“Unfortunately, the CRD-level estimates reported by KAS were discontinued in 2009, so now, no official government-reported data exist of regional values,” Taylor said.

KAS does, however, report state average values for irrigated, non-irrigated, and pasture land, based on an annual survey of agricultural producers, asking for their estimate of the value of cropland and pasture land they operate.

Several potential problems exist with these data, however, Taylor said. “The data for these estimates is a survey of people’s opinions, which may not be highly attuned to the current land market.”

For example, she added, the KAS data have typically lagged behind estimates based on market data, suggesting that changes in land values are moving faster than people not actively engaged in the land markets realize.

Turning to the PVD data for a market-based estimate of land values, the team looked only at undeveloped parcels of land at least 40 acres in size, and only considered non-irrigated cropland and pasture. Characteristics such as parcel size, soil quality rating, percent of pasture and cropland within a parcel, and when a parcel was sold were all used to estimate county-level land values.

“In all cases, the survey-based estimates are lower than the market-based estimates derived from sales transaction data,” Taylor said. “For non-irrigated cropland, the analysis using PVD transactions data suggests a state-level value of $2,516 an acre, a 48 percent increase over the 2012 KAS-reported value of $1,700 an acre.
Across the nine crop reporting districts, the differences range from a 15.4 percent increase over KAS values in the Southeast Crop Reporting District, to an 80.6 percent increase in the Northwest CRD.”

Pasture values are similarly understated by the survey method, she added, noting that the transactions data estimate of $1,589 per acre for the state is 67.2 percent higher than the KAS-reported value for 2012. Regional differences range from a 17.5 percent increase in the Southeast to a 150.8 percent increase over KAS pasture value for the Northwest CRD.

Cropland Rental Rates Also Understated

A separate part of the study that looked at cash rental rates also indicated that USDA-KAS estimates are significantly lower than cash rent estimates using a method of calculating revenue from a crop share arrangement. The decision aid used to guide the latter is the KSU-Lease.xls Excel spreadsheet (here).

“As with crop and pasture land values, many people want to know how recent changes in both the land and commodity markets have affected rental rates for cropland,” K-State’s Taylor said.

Historically, the ratio of cash rent-to-land value (rent-to-value ratio) has been in the range of 5 to 7 percent, she said. This ratio indicates the annual return landowners can expect on their capital investment from renting land out, excluding capital gains. If that relationship still holds, then a state-level estimate for non-irrigated cropland of $2,516 per acre would imply cash rental rates ranging from about $126 to $176 per acre.

“That leaves a large amount of negotiating room for landowners and tenants,” Taylor added, which prompted the economists to use another method. Rather than targeting a particular rate of return on non-irrigated cropland, which may or may not reflect the productivity of the land or current crop prices, cash rents were estimated using a method of calculating revenue from a crop share arrangement.

A comparison of the rental rates from USDA-KAS and those estimated using the KSU-Lease.xls crop share approach adjusted for risk reveals the USDA-KAS estimates are significantly lower – as much as 71.6 percent in the Southwest CRD and 57.4 percent in the Central CRD.

The higher rental rates estimated by Taylor and Dhuyvetter reflect current grain prices, which have been strong. However, any changes in either expected commodity prices or yields (from a continuation of the drought, for example) will alter the rental rate estimates.

“The most important part of negotiating equitable rental rates is to recognize that market and production conditions may change quickly, making continued communication essential to long-term profits for both farmers and landowners,” Taylor said.

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