Should you enroll land in CRP?
The following is an article written by Seth M. Baker for the November issue of Prairie Farmer Magazine. The article can be found on-line HERE.
Highest and best use is an appraisal term defined as the reasonably probable and legal use of land that is physically possible, appropriately supported, financially feasible and results in the highest value. For most Midwest farmland the highest and best use is simple: the production of agricultural products, mainly corn and soybeans. But what about the more marginal land such as floodplain land, poor soils and/or timber and pasture? The answer is not as easy.
One common dilemma for floodplain land is whether or not to enroll the land in the Conservation Reserve Program (CRP). Often floodplain land has a high soil productivity rating but crops can often be lost by springtime flooding costing a season’s worth of income. The annual CRP payments often meet or exceed the likely income from this type of land with less risk. This should be a no-brainer - more income, less risk. But not so fast. Often putting land, even marginal land, into the CRP program can reduce the current value.
Because the income is set for a period of time the rate of return a buyer expects also goes up. Typically, investor’s look for a return on marginal farmland of between 3% and 4%. So a farm that returns $250 per acre would be valued around $7,142 per acre at 3.5%. If a CRP contract is paying $300 per acre, an investor would be looking for a return of between 4.5% and 6%, so the same farm would now be worth $6,000 per acre. So this is the no brainer right? If it lowers the value the answer should be no. Again, not so fast.
While the value may be decreased in the short term, the value over time will depend on the use at the end of the contract. If it can be put back into production the value will return to tillable farmland value at the end of the contract. If the CRP is a tree planting then going back to tillable production may not be easy. However, for the most marginal ground, turning a property into a good recreational tract may in fact increase its value overtime.
There have been some recent sales of recreational properties that have sold at a higher price than marginal farmland. Why? Because it is no longer about economics, it is more about control of the land and its use for someone’s hobby. Hunting and horses are two popular activities that need land to be best enjoyed. People with disposable income are willing to pay for control of the land, making the value for about the supply and demand. Having a CRP contract on recreational land is a good way to increase the value. The income can often offset some of the buyer’s payments over time.
Confused yet? Each situation is different and often can depend on the quality of the land, location, timing and the goals and objectives of the owners and potential buyers. It is important to check with a qualified land professional before making any long-term decisions regarding CRP contracts, selling or buying land. There are many factors that can affect the value of the land now and into the future. Knowing these factors before acting is the key to successful and enjoyable land ownership.