A ranch owner recently asked me about the feasibility of converting a portion of his ranch into farm land, which he would lease. Here are the thoughts I shared with him.

Currently, high commodity prices have inspired buyers to pay historically high prices for farmland. Recent studies indicate that current land buyers are paying more than 30 times cash leases for land. Long-term averages seem to range in 15 to 20 times rents.

Those factors have sparked discussions about whether or not the current prices represent a bubble, with fierce advocates arguing both sides of the issue. FDIC even publicly warned about the danger of a bubble in farmland prices. However, those land prices along with the high commodity prices are bound to be inspiring conversion of grazing land to cropland.

The future is fraught with uncertainty about a number of issues potentially affecting farming and farmland values. The farm program will be rewritten in Congress beginning this year.

Consensus seems to be that the direct payment portion of support for farmers will be eliminated. Listen to our podcast  No. 101 on “Texas Land Issues“ and read “Beyond a Reasonable Drought.”

Both of these discussions took place before the Super Committee imploded, and Joe Outlaw’s (co-director, Agricultural and Food Policy Center) comments took place in the context of Congress trying to redo the farm programs there, outside the glare of publicity that normally comes with the hearings conducted each time the program is renewed. Now, the plan devised for the Super Committee is basically out the window and they will be starting from square one.

Not only is the support program mired in political considerations, corn ethanol seems to be a basic driver of the high prices for all commodities. As Outlaw noted, corn prices affect everything else.

If, as appears to be the case, political support for the ethanol mandate in fuel erodes, that price driver may be diminished possibly by a considerable amount. It is anyone’s guess how this will all turn out. Check out the information at the Policy Center website. Their Baseline Working Papers have their latest analyses of operating and market conditions for all phases of agriculture.

I presume that you anticipate converting to irrigated cropland. Water can be an issue if there is a groundwater conservation district that controls pumping in your area. However, it might be prudent to use some water to establish an historical precedent in case water laws change to allocate rights based on use as the legislature has done with the Edwards Aquifer.

Another possible difficulty might be finding a tenant. If there is a large active farming community in the area, you may have no problem. However, some regions have a small community of farmers that are willing to lease land. Some owners find a “take it or leave it” offered rent in those regions that is below the amount that they had anticipated.

The conversion would entail giving up current activity on the ranchland. I presume that might reduce the level of hunting on the property. In addition, it will cost to convert to cropland. Currently rangeland is more valuable per acre than most cropland in South Texas. See the Region 6 value analysis. Be careful to avoid converting land to a lower valued use.

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