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Low interest rates, strong farm earnings support farmland values

Rising farmland values defy slow economy. Farmland prices nationwide have demonstrated moderate to substantial strength. Changing energy policies could have an adverse affect on farm revenues, which in turn could negatively influence farmland values.

In contrast to a sluggish economy over recent years, farmland prices nationwide have demonstrated moderate to substantial strength on average, with farm real estate values increasing by as much as 31-percent in a single year (Iowa farmland values, third quarter 2011).

While the average increase in farmland value ranges between a more modest 2 percent to10 percent annually over the last 18 years, it still stands in sharp contrast to the depressed commercial and residential real estate markets since the onset of the recession as far back as 2006.

A recently released USDA Economic Research Service study outlines the strengths and weaknesses of farmland values over the last two decades and sheds surprising detail on how farmers have been able to take advantage of strong rural land prices at a time when the rest of the nation faced troubling economic times. While not all the news about farmland values was good nationwide, with the exception of declines in more urbanized states along the East Coast where residential and commercial development strongly influenced farmland values, rural areas in most states and regions demonstrated remarkable strength, considering the economic challenges of recent times.

The study reveals farm real estate, with a value of $1.85 trillion, accounted for 85 percent of the total value of U.S. farm assets in 2010 and represented the largest single investment in a typical farmer’s portfolio. As such, strong farmland values have had a positive affect on the financial well-being of most agricultural producers. In addition to value-added strength to their portfolios, farm real estate also served as the principal source of loan collateral, which in turn enabled many farmers to purchase more rural property and expand their agricultural operations. As such, ERS researchers have determined that rural land price over the last 15 years has been a critical barometer of farm sector performance and a window into the financial stability of agricultural producers.

Policy implications

In addition, the study suggests changes in agricultural land values may have implications for a wide range of policy issues including commodity programs, conservation payments, agricultural competitiveness and industry structure. The study also indicates that farmland value is greatly influenced by income streams generated as a result of agricultural land use and that higher farm incomes can lead to greater land values and real estate marketability. Yet the study suggests the link between farm incomes and farmland values is weakening because of other factors.

One such factor, according to the study, shows that in areas near urban centers the value of farmland can be largely influenced by the degree of commercial development in near proximity. In other words, farmland values may increase as a result of industrial or commercial development on adjacent or nearby land. Even in rural areas, non-farm developments, such as property used as a hunting lease or some other form of revenue producing activity that does not involve farming, can affect land values.

The study further concludes that a substantial number of farm operators do not engage in farming as a primary occupation and that many rural property owners maintain off-farm jobs as a primary source of income.

According to researchers, comparisons of RTV (rent-to-value) ratios indicate the changes in value of land relative to farm income.  RTV is determined by calculating the average cash rent per acre divided by the average per acre value of land. The study indicates that has been decreasing over the last half century.  In addition, the study suggests decreasing RTV ratios is indicative of the growing importance of nonagricultural factors in determining rural land values that may not be reflected in rents.

Of concern to most farmers is the question of whether farm earnings will continue to be sufficient to service farmland mortgages. While farm incomes have increased and interest rates have fallen in recent years, that trend could slow or even reverse in the years ahead, bringing into question the ability of farmers to afford additional farmland in the near future, and the subsequent impact that might have on the demands for increased food production as populations grow and food demand increases.

Another substantial factor to consider is that possible changes in farm support through the farm bill could greatly affect farm income in the years ahead, and this would also greatly affect the ability of agricultural producers to afford additional farmland acquisition.

Another factor could be that historically low interest rates could be on the rise, and as interest rates go up they will adversely affect farm incomes and subsequently availability of funds in support of loan payments and the ability of farmers to acquire new real estate.

Also, current demand for crops for food and for energy continue to help support farm incomes, but changing energy policies could have an adverse affect on farm revenues, which in turn could negatively influence farmland values.

To review the complete USDA-ERS study, connect here.

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