DENVER – Ongoing gains in U.S. farmland values continue to stabilize farm balance sheets while meeting performance expectation for non-farm investors.
The good news comes from the American Society of Farm Managers and Rural Appraisers.
A big asset. Farmland is identified as the biggest asset on the nation’s farm operations’ balance sheets.
The society touts recent increases in farmland values as a major contributor in sustaining economic conditions within the agricultural sector and credits increases to low interest rates, consistent rate of return, slow rate of inflation and poor performance in alternative investments.
Midwest moola. Charles Knudson, accredited rural appraiser in Normal, Ill., said Midwest farmland of all qualities and locations continue to be in demand.
“For the investor, land remains an attractive alternative due to its capital preservation and positive income return benefits, its low to moderate risk factors and its portfolio diversification characteristics,” he said.
“As for the farmer – acquiring more land means expanding their operation with greater income drawn from pre-existing management efficiencies.”
Interest rates. Low interest rates have reduced borrowing costs and strengthened buying power for those targeting farmland as a long term investment.
“Interest rates on farm loans have dropped more than 2.5 percent on average over the last two years,” Knudson said.
“While this is good news for operators who own their land, it’s great news for investors wanting to re-direct money from poorly performing stocks toward less volatile investments.
“Plus, increases in appreciated farm real estate values add to the overall big picture benefit.”
Consistency. For the 16th year in a row, farm real estate prices have experienced incremental increases as reported by USDA’s National Agricultural Statistics Service.
As a positive reflection of the times, Knudson said production farmland typically provides nominal annual returns of 8 percent to 10 percent and real returns of 4-6 percent.
Returns typically consist of current income from yearly crop sales or lease payments plus land appreciation.
Cash rents. The USDA’s national review of cash rents paid in 2003 increased two percent from the year previous, jumping the national average to $73 per acre, compared to $71.60 for 2002.
In the Midwest, rents averaged $110 per acre while the Northeast rents jumped to $48 per acre. In the Southeast, cropland cash rent surprisingly dropped two percent to $44 per acre while the Pacific regions rent rates remained unchanged at $180 per acre.
According to Knudson, cash rent values on certain types of farm real estate can be influenced by government program support.
“In regards to farm bill provisions, program payments are sometimes capitalized into the value of land and also rental rates,” he said.
“And because payments can be perceived as guaranteed returns for the life of a farm bill, landowners often bid them into the selling and renting price of land.”
Transition. While borrowing power and farm program benefits aid in boosting values on certain crop-based acreage – these factors can not take credit for all the gains in farm real estate, said Ron Geer, chief appraiser for First Pioneer Farm Credit Services in Lebanon, N.J.
“Significant impact on today’s values is the result of rapid urbanization,” he said.
“Rural America is no longer about production agriculture only. It’s also about transitioning farmland into commercial and residential development.”
In states like New Jersey where farmland is in huge demand, Geer believes current market value can be attributable exclusively to non-farm demands.
“Absentee landowners are interested in farmland for two primary reasons. First, to diversify their investment portfolio, and second, to eventually divide their land into parcels for development – both of which are greatly influenced by a property’s proximity to urban areas.”
Values soar. For landowners in the path of urban and commercial growth, Geer said it is not uncommon for many Eastern region landowners to experience double digit increases in their land holdings in just a matter of years.
The proportion of land buyers who are investors has risen considerably over the past 15 years.
USDA historical data reports that in 1989 non-farm investors represented only 12 percent of the purchasers. In 2001 this same group represented 27 percent of all farmland purchasers.
According to Geer, the growing popularity of land as a portfolio diversification tool is the result of stock market declines and poor returns on money market funds which have therefore reduced the attractiveness of these mainstream investment classes.
“As a diversification vehicle, farmland can stabilize investors’ earnings and appreciation more consistently over a greater number of years. It can also readily offset volatilities occurring in both the stocks and bond markets.
“And the long term benefit of realizing huge net gains through land sales in urban areas makes farmland even that much more attractive.”
“The long term objective for farmland surrounding the metro fringe is based on appreciation with the end goal resulting in future sales for development uses.
“Because of this, investors are willing to either break even or even operate in the red for a period of time without too much worry on behalf of owners.”
For production acres bordering urban development, Havranek said it is not uncommon in Arizona to see investors or developers paying from $30,000 to $100,000 or more per acre.
“The payoff comes at the time of sale – yielding a huge return for those who wait for urban and commercial development to head their way,” he said.
Scenery. Land specifically targeted for recreational activities and personal enjoyment is the biggest motivator for buyers right now, according to Paul Bierschwale of Bierschwale Appraisals in Junction, Texas.
“The price that someone is willing to pay for a piece of property depends greatly on how that individual perceives its value – which doesn’t necessarily have anything to do with current and or projected future net return. It’s all about the aesthetics and secondary use of the property.”
Parcels. According to Bierschwale, statewide trends for ranchland sales continues to be driven as a result of fragmentation – meaning large partials being split off into mid-sized properties.
“Farms and ranches are being broken into smaller ownership parcels. The land is shifting from rangeland and crop land use to more personal use either as hunting and wildlife retreats or for rural home ownership,” he said.
Future outlook. “While much of the current value of farmland reflects the ongoing ability to grow crops and raise livestock, non-farm factors are certainly influencing much of today’s market value,” said Knudson.
The Illinois appraiser, along with his counterparts, anticipates that farmland demands will remain strong over the next several years.
“A strengthened economy over the next year or so should stimulate increases in interest rates. This could slow down the rate of increase in farmland values, but other forces like urban expansion and recreation demand will provide price strength for much of the nation.”
Knudson expects farmland values to continue to hold steady at a 4-6 percent annual increase over the long term.
“Owning a piece of America means different things to different people as far as production agriculture, pride in ownership, emotional and family attachment and investment goals and objectives,” he said.
“Value to a buyer is not always aligned with state averages and region pricing trends. The price that someone is willing to pay depends on many factors including available capital, short and long term earnings, personal income requirements, need to offset risk, recreation attributes and pride in personal land holdings.
“In the end – it’s a mix of criteria that establish farm real estate values and ultimately the final price that someone is willing to pay for our nation’s greatest resource which is land.”
Land investment considerations
* Commodity prices: Volatile in nature, but up trending over time.
* Greater yield potential: Yield increases continue due to precision farming and plant biotechnology advancements.
* Global demand for food: Need for agricultural resources will continue as billions of people upgrade lifestyles.
* Government policy: Favorable capital gains and estate tax changes to continue under current administration.
* USDA Farm Programs: 2002 Farm Bill will encourage greater exports and protect farm income requirements.
* Interest rates: Remain favorable for land owners and agricultural producers.
* Inflation: Estimated to increase as economy comes off 10 years of 2.5 percent growth.
* Alternative investments: Other investments providing low rates of return versus agricultural lands providing annual return and annual increases in value.
U.S. Farm Real Estate:
Average Value per Acre by Region
Region Per acre, 2002 Per acre, 2003 Percent Change (+/-)
Northeast (Del., Md., N.J., N.Y., Pa., Others*) $2,810 $2,950 5.0
Lake States (Mich., Minn., Wis.) $1,850 $1,990 7.6
Corn Belt (Ill., Ind., Iowa, Mo., Ohio) $2,190 $2,290 4.6
Northern Plains (Kan., Neb., N.D., S.D.) $573 $594 3.7
Appalachian (Ky., N.C., Tenn., Va., W.Va.) $2,260 $2,420 7.1
Southeast (Ala., Fla., Ga., S.C.) $2,260 $2,420 7.1
Delta (Ark., La., Miss.) $1,330 $1,400 5.3
Southern Plains (Okla., Texas) $718 $748 4.2
Mountain (Ariz., Colo., Idaho, Mont., Nev., N.M., Utah, Wyo.) $508 $526 3.5
Pacific (Calif., Ore., Wash.) $2,050 $2,120 3.4
*Other states – Conn., Maine., Mass., N.H., R.I., and Vt. Data excludes Hawaii and Alaska.
Source: August 2003, National Agricultural Statistics Service, USDA
U.S. Cropland:
Average Value per Acre by Region
Region Per acre, 2002 Per acre, 2003 Percent Change (+/-)
Northeast (Del., Md., N.J., N.Y., Pa., Others*) $3,210 $3,390 5.6
Lake States (Mich., Minn., Wis.) $1,780 $1,860 4.5
Corn Belt (Ill., Ind., Iowa, Mo., Ohio) $2,340 $2,450 4.7
Northern Plains (Kan., Neb., N.D., S.D.) $719 $738 2.6
Appalachian (Ky., N.C., Tenn., Va., W.Va.) $2,400 $2,520 5.0
Southeast (Ala., Fla., Ga., S.C.) $2,100 $2,220 5.7
Delta (Ark., La., Miss.) $1,150 $1,200 4.3
Southern Plains (Okla., Texas) $802 $860 7.2
Mountain (Ariz., Colo., Idaho, Mont., Nev., N.M., Utah, Wyo.) $1,130 $1,190 5.3
Pacific (Calif., Ore., Wash.) $3,670 $3,720 1.4
*Other states – CT, ME, MA, NH, RI, VT Data excludes Hawaii, Alaska
Source: August 2003, National Agricultural Statistics Service, USDA
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