Showing papers on "Consumer price index published in 1976"

Inflation and Crop Profitability: How Much Can Farmers Pay for Land?

Abstract: The purchase of a parcel of farm land can be one of the most difficult investment decisions confronting farm operators. Compared with other production inputs, land is purchased infrequently and usually involves a large, longterm financial obligation. The land investment decision is especially critical today, when many are questioning the ability of farm income to support current land values at "normal" commodity prices. Fairly stable relationships existed during the 1960s between land values, net returns to farming, and the general rate of inflation (see table 1). However, during the 1970s and especially since 1972, land prices have escalated sharply, net farm income has been very volatile at high levels, and nonland production costs have increased faster than the general price level (consumer price index). These recent trends raise serious questions not only of magnitude but also direction of movement for these important determinants of how much farmers can pay for land. We accept the proposition that prospective buyers must evaluate investments and make decisions based on present conditions with appropriate allowances for future anticipated trends. In this paper, we have not attempted to guess the future direction nor magnitude of these important variables but have developed a framework for analyzing farmland investments. A capital budgeting decision model developed by Lee for evaluating farm real estate purchases is used to test the land price sensitivity of a set of decision variables. Specific case situations are analyzed by comparing buyers with different characteristics, each facing favorable and unfavorable economic trends. These specific situations are then compared to illustrate how much farmers can fford to pay for land under specified conditions and expectations. For purposes of analysis, a Corn Belt farm situation is assumed, although the general results and conclusions would apply to most parts of the country.