Even though agricultural property taxes in Indiana have risen by 33 percent since 2007, farmland continues to be one of the best investments a producer can make.
Agricultural property taxes fluctuate in Indiana since they are based on a number of factors that contribute to the estimated income from farming that land.
Crop prices soared in recent years, then 2014 set a state record for corn and soybean yields, sending prices tumbling downward. Meanwhile, land rent prices have continued to rise, and those figures, combined with crop prices, are used to estimate the income earned from farming an average acre, Purdue University Agricultural Economics professor Larry Deboer said.
Further, the nation hit the beginning of a deep recession in 2007, causing the Federal Reserve to slash interest rates to unprecedented lows.
When farmers’ incomes are up and interest rates dip, the base rate for those property taxes rises. The base rate for 2015 has been slotted at $2,050, a 16 percent increase from the 2014 base rate of $1,760.
“Real estate taxes are going up because land values are going up,” said Pat Karst, vice president of Halderman Farm Management and Real Estate Services, which manages the needs of farms in 19 states.
“The new formula takes into account recent land sales, and it’s trying to get more towards a market value rather than an assigned value. As land values have risen, the assessed value goes up, and therefore your taxes that you actually pay have gone up.”
Despite the skyrocketing prices, farmers' pockets haven’t seemed to be put under catastrophic strain because interest rates remain so low that it’s created an insulation of sorts.
In fact, Halderman president F. Howard Halderman told those in attendance at a presentation on the subject last week at Ivy Tech in Peru, farmland remains the best investment in a farmer’s portfolio.
Halderman said there are three main drivers of farmland values. The most significant is farm income, which is crop yield multiplied by price.
Next, interest rates affect value from the cost in dollars to buy farmland, as well as the return to other investments, such as CDs and bonds.
“Right now when CDs are at 0.5 percent and farmland makes you 3 percent, farmland is on the plus side of that,” Halderman said. “But, if interest rates go up to where CDs are all of the sudden 5 percent, and farmland is making 3, you will have some people who choose to keep their money in CDs as opposed to farmland.”
Higher farm incomes combined with low interest rates have benefited Indiana in recent years, causing farmland prices to increase.
Then there's supply and demand. Little farmland has been for sale lately. This climate led to farm income records in 2007, ’08, ’11 and ’12.
As a result, farmland values reached an all-time high in March of 2014.
Going into 2015, long-term world demand remains optimistic for agriculture.
“We still have a growing demand,” Halderman said. “I was at a presentation last week, and Dr. Jay Lehr said that 230 million people in China are [set] to move to the middle class. He probably provided the best definition I’d ever heard for middle class. Middle class means they have the ability to feed, clothe and house themselves with a little discretionary income left over above that.”
In theory, members of the middle class tend to buy better food, which includes more protein.
“If 230 million people in China are going to move to the middle class in the next 10 years, that’s the population of the United States moving to the middle class. That’s a lot of people. … All of that still remains bullish for agriculture long-term,” Halderman added.
Simply put, basic economics is what’s keeping farmers from panicking over the skyrocketing increases in tax rates and farmland prices.
In 1928, the world’s population was 1.2 billion people. The United States made up 10 percent of that population, and at the same time, provided 10 percent of the world’s agricultural output.
By 1968, the world’s population had ballooned to 3.5 billion. The U.S. made up 6 percent of the world’s population, but increased its agricultural output, providing 20 percent of the world’s crops, doubling the output in 40 years.
Those numbers continued along the same path, and by 2012, the world’s population rose to over 7 billion. The U.S. now makes up 3 percent of the world’s population, but in modern times, produces 30 percent of the world’s agricultural output.
There’s money to be made for farmers, especially in as north central Indiana, where soil quality is considered superior to other parts of the state, country and world.
“Literally, farmers in the United States feed the world,” Halderman said. “We’ve been doing it for a long time. That’s not a surprise. But the U.S. producers combined with U.S. technology, we have the ability to do it. I think a lot of the global money looks at the U.S. for that reason. There are a lot of reasons to not invest in the U.S., tax treaties and other things, but they still come back here and stay, ‘Yep, it’s the safest place to go.’”