Farmland Prices vs. Underlying Economics: A Market Paradox Unfolds

In a recent review of budgets for corn, wheat, and soybeans by leading U.S. agricultural universities, Ben Palen of Ag Management Partners noticed a stark imbalance between land prices and crop costs.

The study used 'honest' numbers, taking into account the opportunity cost of capital and real yields, which showed significant losses across various locations and crops.

Palen suggests that this discrepancy is due to the uncertainty factor caused by inconsistent federal policies and rising input costs, particularly for fertilizer, following the Iran fiasco.

The author questions how farmland prices can remain high when underlying economics suggest otherwise. He highlights instances where land with no or minimal debt is being purchased at inflated prices, averaging out the cost over more acres.

Palen argues that this approach ignores a basic tenet of investing: purchasing assets only if they generate revenue. He cites examples of regions with similar soil productivity and grain prices but vastly different land price per soil PI point ratios.