USDA: Farmland values rise
If you bought U.S. farmland from 2000 to 2016, the land most likely is worth more now than what you paid for it. But economic returns to the farmland don't justify its current price, suggesting that "a decline in values is possible."
Those are among the conclusions of "Farmland Values, Land Ownership, and Returns to Farmland, 2000-2016," which recently was released by the U.S. Department of Agriculture's Economic Research Service.
According to the report:
• Average U.S. per-acre farm estate values (which include the value of land and buildings) more than doubled, rising from $1,483 per acre in 2000 to $3,060 in 2015. Increases were especially pronounced in 2004 to 2014, reflecting high net cash farm income.
• Declining crop prices in 2015 and 2016 slowed the upturn in land values and in some areas, including the Upper Midwest, have led to small dips overall.
• Except for 2003-05 and 2011-14 when net cash farm income was strong, land values in 2000 to 2015 were "higher than economic theory would predict." In other words, profits generated by the farmland weren't high enough, at least in theory, to warrant its sale price.
But farmland values make more economic sense when the so-called "capitalization rate" is considered, the report said. The term refers to the rate of return that an investor can expect to receive on a real estate investment property. Put differently, the capitalization rate is a property's yearly income divided by its total value.
Example: If an investor receives $5,000 on a $100,000 property, the capitalization rate is 5 percent ($5,000 divided by $100,000). If the cost of the property is $250,000, the capitalization rate is 2 percent ($5,000 divided by $250,000).
Though the capitalization rate of farmland has been declining — in other words, becoming less attractive financially — low interest rates continue to make competing investments even less appealing, the Economic Research Service report said.
Recreational uses for farmland and the potential development of farmland near urban areas also have pushed farmland values above what ag profits from it would seem to warrant, the report said.
What the future holds
Rising interest rates will push down farmland values, the report said.
Higher rates increase the cost of borrowing money to buy land, discouraging would-be buyers from doing so. Higher rates also make competing investments, such as certificates of deposit, more attractive, reducing financial incentive to buy land.
The report also found that older, experienced farmers — who already own land and were able to borrow to buy more — were more likely than young farmers to buy land during the runup in land values.
But that could change if the runup is over, the report.
"Young and beginning farmers may find it easier to purchase land when land prices level out of decline," the report said.
Potential changes in commodity programs, conservation programs and crop insurance also could affect farmland values, the report said.