I was interviewing a farmer in a soybean field not far from Clarksdale, Miss., a few years back when the grower happened to mention that the land was rented.
“Who's your landlord?” I asked, more out of idle curiosity than for information for the article. “The Pennsylvania State Teachers Retirement Fund,” said the grower, who farmed in Coahoma and Tunica counties but lived in Tunica.
Such long-distance landlord-tenant relationships, which struck me as odd six or seven years ago, are becoming more and more common, according to Rich Aust, farm manager and trust officer for AmSouth Bank in Memphis, Tenn.
“We're seeing more non-farm investor/buyers in the market today,” says Aust, who grew up in Clarksdale, graduated from Mississippi State University and went into the ag lending business. “The buyer profile is different today than it was in the 1970s and 1980s when owner-operators were the rule.”
Speaking at a meeting of the Memphis Agricultural Club, Aust said a number of factors are making farm real estate more attractive to non-farm investors, including a steady growth in values since the farm real estate bust in the mid-1980s.
After dipping to a low of $599 per acre in 1987 during the fallout from the recession that hit agriculture in 1984 and 1985, the average value of farm real estate in the United States climbed to $1,510 an acre in 2005, according to USDA's National Agricultural Statistics Service.
The average value of U.S. cropland has mirrored that rise in recent years, jumping from $1,270 per acre in 1997 to $1,970 last year, according to a report released by NASS in August 2005.
The situation in nearby states has been keeping pace with the national average. Between 2004 and 2005, farmland values in Arkansas rose from $1,650 to $1,820 or 10.4 percent; in Louisiana, $1,580 to $1,680 or 6.3 percent; and in Mississippi, $1,480 to $1,580 or 6.7 percent.
Although non-farm landowners, such as the teachers in Pennsylvania, may rarely see their investments, they still feel better knowing they have a tangible asset that, as the saying goes, “they're not making anymore.”
“Some people still have stock market jitters, and they see land as stable and attractive with lower risk,” says Aust. “We're also seeing interest continue in land for recreational use and for 1031 exchanges (named for a section in the IRS Code that allows like-kind exchanges of property for tax deferrals).”
Lenders are also requiring more realistic loan-to-appraised values; i.e., more cash up front, than in the last farm real estate boom that occurred in the late 1970s and early 1980s, he said.
“The 1996 and 2002 farm bills have also been positive to farm investments because of the fixed or direct payments,” says Aust. “The Wetlands Reserve and Conservation Reserve Programs have also idled marginal lands, increasing the value of better farm lands.
“Land values are no longer tied only to the productivity of that farm's soil classification.”
Aust talked about the three-legged stool some experts use to describe the factors that go into determining land values.
“You have the contributory value of USDA payments from the late 1980s to the present,” he said. “Then there's the productivity value that was predominant from the post-World War II-era to the mid-1970s. Today, the third leg consists of recreational value, adjoining buyers, the desire for a rural lifestyle, ‘they're not making anymore’ and 1031 exchanges.”
Farmland owners only have to look at the edges of metropolitan areas to see another factor in rising land values. Low interest rates have been fueling a boom in housing starts that seem to be taking more and more farmland.
“The conservation title of the farm bill also seems to be gaining in importance relative to the commodity title in the debate over the next farm bill. USDA has just completed a new sign-up for the Conservation Reserve Program, which is now targeted at 39 million acres.
Not all the skies are blue in the farm real estate market, says Aust. Lenders are concerned that the round of recent interest rate increases engineered by the Federal Reserve Board could slow the rate of demand for farmland in the urban and rural markets. The current budget deficits could also bring higher tax rates.
“Low commodity prices, higher energy costs and weather events like Hurricane Katrina have taken their toll on operator profits,” he noted. “We had reports of cotton lint being blown on the ground and rice knocked over into the north Delta region after Katrina passed through.
“We're also hearing concerns about the tenant base in some areas being too small or about the aging of the farm population. And owners' expectations of rental values may be too high in some cases. The new technologies may be the only way some guys are staying in business.”
On the whole, however, the farm real estate market appears sound. “The last time we had a real estate crisis it started with agriculture,” said Aust. “This time agricultural real estate will lag behind residential and commercial if prices start falling.”