High crop and livestock prices certainly support the upswing in farm and ranch land values, but a new USDA report outlines some of the other forces at work. The report, titled “Trends in U.S farmland value and ownership,” notes that farm real estate accounts for a large share of total farm assets – 84 percent in 2009 – and the value of that real estate is subject to a range of economic factors.
Those factors include alternative investments, interest rates, and debt-servicing capability, in addition to parcel-specific factors such as soil productivity, proximity to delivery points like grain elevators and highways, and the land’s development potential.
The report’s authors note that while farm earnings since 2009 have supported the upswing in farmland prices and were more than sufficient to service debt n farm real estate purchased at current mortgage rates. However, farmland prices have at other times increased without proportionate increases in farm revenues. Between 1978 and 1985, and 2005 and 2008, farming income was insufficient to service debt on farm real estate purchases.
The report also notes that historically low interest rates are likely a significant contributor to farming’s current ability to support higher land values. Higher interest rates would likely put downward pressure on farmland values.
So what is the impact of investors and speculators in farmland price inflation? The report’s authors note that across the Northern, Southern Plains and Corn Belt regions, non-operating owners control more than 30 percent of the agricultural land. Non-operators owned 29 percent of all land in farms in 2007, and they owned 77 percent of farmland that is rented. Nearly a quarter of farmland purchases in Iowa were made by investors in 2009
Foreign ownership of agricultural land probably is not a major economic factor in farmland prices, as foreigners owned just 1.7 percent of privately owned land in farms or forest, or 22.8 million acres, as of February 2009.
The farmland rent-to-value (RTV) ratio is the cash rent per acre divided by the land value per acre, and serves as an indicator of how quickly land would pay for itself. The report shows that the RTV ratio generally has declined for the past 45 years. In 1951, if agricultural rents were the sole source of returns from farmland, the farmland would have paid for itself in about 14 year. By 2007, that payoff period had grown to 33 years. The authors note, however that non-agricultural returns from development or other activities play a rule, making decreasing RTV ratios consistent with the growing importance of nonagricultural factors in determining land values.
The report also cites the balance between cropland versus pasture-land values as an indication of non-ag influences on ag-land prices. Cropland values typically exceed pasture values, and are twice as high in some areas. Those premiums have been shrinking, however, and in the Southeast and Delta regions, average cropland values have fallen below average pasture values since 2004. The authors suggest this trend could be due to pasture land providing income from recreation such as hunting leases. In some areas such as the Southeast, pasture land tends to be closer to urban areas and development demand.
Farm-program payments probably have some influence on land values, although the full impact is unclear. The authors note that uncertainty about the renewal of major farm commodity programs and future interest rates could reduce the attractiveness of farmland as an investment relative to other alternatives.
Read a summary or the full report online from USDA.