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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Third quarter 2011 land market activity declined throughout Texas compared to 2010. Renewed interest in cropland, combined with a fear of coming inflation, provided upward pressure on cropland prices. However, for the third straight year, large properties sold less frequently than in past years.

Sales volume continues to lag behind numbers of transactions seen in recent years. Markets continued to post volumes last seen in the 1990—2000 era. These facts reinforce information gathered from appraisers and brokers who report potential buyers are making low offers presuming that prices will eventually drop.

Buyers are still hesitant to pay current prices. Nevertheless, some buyers have grown weary of delaying and have opted to buy good quality properties at today’s price levels.

Without an external shock to the economy, market prices have firmed. However, a glance at the actual acreage transferred in reported sales shows an unusually low number of acres changed hands for the third straight year. These circumstances reflect the general discomfort abroad in the overall economy as the world continues to grapple with the problem of excessive debt in financial markets. These disquieting forces create a heightened apprehension of risk and suggest that buyers will continue to expect price erosion while sellers resist sales at prices below recent historical norms.

Anecdotal evidence suggests that cropland investors continue to actively seek land. However, dismal yields caused by a drought of historic proportions and the threat of substantial changes to government crop supports could lower demand for this land. While these circumstances have not weakened demand for cropland they have muddled prospects in the future.

Rangeland markets face formidable challenges as potential buyers anticipate lower prices and sellers refuse to accept low-priced bids. Transitional tracts near urban areas still face slack de-mand over the coming year. By contrast, bustling activity in the oil patch continues to inject cash into Texas communities. Mineral producers and royalty owners have realized substantial profits with no end in sight. Evidence is beginning to emerge indicating that some of this prosperity has begun to focus on land.

Despite these positive forces, the problems dragging down the economy will likely ensure little change in prices or sales volume for the near future.