Interest rates help push farmland values; buyers ‘locking into land’

DENVER – U.S. farmland values continue rising at rapid rates, according to the American Society of Farm Managers and Rural Appraisers, with some locations experiencing sales well above peak market prices.
Market stimulants responsible for robust values, as determined by the appraisal group, are high commodity prices, affordable interest rates and a sustained rate of inflation.
Urban sprawl. These factors are supported by surging urban development and positive gains in both short and long-term appreciation.
Ron Geer, accredited rural appraiser and chief administrative appraiser with First Pioneer Farm Credit in Lebanon, N.J., said investors are ‘locking into land’ for two reasons.
Solid returns. First, because farmland under agricultural production remains a solid asset that provides nominal annual returns of 8 percent to 10 percent and real returns of 4 percent to 6 percent.
And second, Geer adds, because of strong appreciation characteristics, which is a significant draw for the nonfarmer investor audience.
Geer said nonfarmer land owners have been extremely satisfied with land returns over stock market returns in recent years.
Farmland rates of return have consistently moved upward compared to stocks that have been less predictable over the past five years.
“Investor confidence also has a lot to do with soaring land prices due to rapid appreciation in pocket spots throughout the country,” he adds.
“And it won’t stop here – with real estate and appraisal professionals predicting that U.S. farmland will become even more popular as the stock market continues to waver in its stability and earning power.”
Future development. Beyond the desire to acquire land in itself, Geer said the trend surrounding farm real estate purchases is not focused on annual income from agricultural production but on “transitioning property into future residential and commercial development.
“And land moving out of production and into development is where premium pricing per acre is most evident.”
Location, location. It’s all about location, Geer adds, and land adjacent to urban growth sells far above regional and national price averages, which can be attributed to competitive pricing for that specific locale.
As reported by USDA’s National Agricultural Statistics Service, U.S. farm real estate prices have experienced positive incremental increases for 17 consecutive years.
As of January 2004, U.S. farm real estate values including all land and buildings averaged $1,360 per acre, up 7.1 percent from the previous year.
This is the largest percentage increase since 1994, when farm real estate values rose 8 percent from the previous year.
Northeast boom. The highest farm real estate values were in the Northeast region where urban influences drove 2004 average values to $3,400 per acre.
Rhode Island and Connecticut currently have the highest averages of any state with per acre values reaching $10,200.
In the Appalachian and Southeast regions where urban and recreational influences are increasing, farm real estate values rose 5.5 percent to $2,500 per acre and 6.6 percent to $2,420 respectively.
Specific to cropland values, the Corn Belt rose 8.4 percent from 2003 to 2004, reaching $2,460 per acre.
The highest average cropland values at $9,900 per acre were identified in New Jersey, followed by Arizona at $6,400 per acre and then California at $6,200 per acre.
Land banking. Considered a sound and solid investment, land is a physical asset that remains ‘golden’ right up until the time of sale, said Tony Correia, accredited rural appraiser and owner of Correia-Xavier Inc. in Fresno, Calif.
Over the life cycle of thousands of California-based land holding deals, Correia has witnessed investors selling at the exact time when market values are prime for substantial profit.
“Land is that one investment that does not fluctuate up and down in price from one day to the next,” he added. “Consistent appreciation is its normal growth pattern and a sure winner for creating wealth.”
Assessing the future. Current sales trends show that most U.S. farmland is acquired for long-term agricultural production and anticipated appreciation.
The limited supply of land for sale, combined with strong demand including rural residences and nonfarm development, the strong liquidity of buyers, renewed interest by farmers and nonfarm investors in farmland purchases, and low long-term interest rates have all continued to provide strength to the U.S. farmland market.