Value of Farmland Continues to Rise

Big government payments to farmers, growing interest in preserving rural land and residential development are keeping land prices afloat.

By Vandana Mathur

March 12, 2002

National farmland values will continue to rise in years ahead by about 1%-2% a year above the rate of inflation, in spite of dismal prices for major agricultural commodities such as corn, wheat and soybeans.

Much of the gain results from the big payments that farmers have been receiving under federal farm support programs—payments that will continue under a new farm bill being drafted by Congress. Without such aid, the value of most of the nation's farmland would be declining.

Land values in the 11-state region stretching from North Dakota to Arkansas rose 3% in each of the past three years, according to AgriBank, lender and provider of business services for the U.S. Department of Agriculture's Farm Credit Services. That increase slightly outpaced inflation. Nationally, farmland values rose 3% in 2001, according to Keith Collins, chief economist at the USDA. The overall inflation rate in 2001 was 1.6%. Farm support payments "have added nearly $62 billion to U.S. farmland values," say economists at the USDA's Economic Research Service (ERS). They estimate that direct government payments went to about 43% of the nation's farms in 2000. The bulk of that aid was for commodity support programs. About 8% was for conservation and other programs.

The Corn Belt alone accounts for about $40 billion of the market value of farmland because of the large number of acres devoted to major crops such as corn, wheat and soybeans. In the Plains states, about 22%-23% of land values rests on program payments. "Without those programs, about $12 billion would drop from land values," says Porter Martin, an Illinois-based land consultant.

ERS economists note that, like the value of any income-earning asset, land value increases as expected long-term earnings increase. In land markets, "farmland buyers pay a higher price to acquire land that is expected to yield a larger stream of income, regardless of whether the source of that income is market-based agricultural production, nonagricultural use, or government payments," according to the ERS. Farmers received about $21 billion to $23 billion a year from the government from 1999 to 2001. By comparison, government payments accounted for less than 4% of net cash farm income in 1980.

Higher land values "are a double-edged sword for American farmers," according to the ERS. For farmers who own their land, higher values contribute to financial stability and serve as collateral for farm loans. But higher values make it harder for beginning farmers to buy cropland and increase the cost of renting land.

Government payments have been large in recent years to supplement declining farm income, which was triggered by export declines prompted by the 1998 financial crisis in Asia. Although U.S. exports have recovered somewhat, they are still below the level they were at before Asian economies turned sour. Prices for bulk commodities are still weak, with little prospect of significant improvement in the near future.

Congress is drafting a compromise between the House and Senate versions of a farm bill that assures farmers a steady source of government payments if crop prices fall below a certain level. The final bill will likely increase annual farm income by about $4 billion, ensuring that land values will continue to climb. The new farm law will channel billions into conservation programs, which will also boost land values. "Uncle Sam is already America's largest farm cash-rent tenant, paying an average of $46.75 per acre rent on 560,249 CRP [Conservation Reserve Program] contracts totaling 33.7 million acres in 2002," Martin says. "That's a cash flow of $1.576 billion annually on cropland that has, by definition, marginal productive value."

Local and state initiatives to preserve rural land will also continue to pump up farmland values. "Land trusts and other preservationist groups inject at least $2 billion a year into the U.S. marketplace for rural land," notes Martin. In 2001, 137 ballot measures around the country approved $1.7 billion in funding for parks and open-space conservation, according to the Land Trust Alliance, an umbrella organization for preservationist groups. Such conservation programs restrict the supply of land for development, which in turn enhances the value of land that remains available for development.

Growing interest in buying farmland for hunting and other recreational use and for building rural second homes has also added to farmland values, according to Martin. In the Corn Belt, sellers often carve up a large farm into eight or nine "farmettes" to attract a wide array of residential and recreational buyers, he notes.

Farmers buy about 60% of the farmland available for sale. They spend about $3 billion to $4 billion in exchanges or sales of easements and about $5 billion to expand their farms and ranches per year, according to Martin. Those who buy farmland for residential or recreational use spend about $2.5 billion a year. People buying farmland for investment purposes spend about $2 billion a year. And those who buy farmland for preservation or conservation purposes spend $1.5 billion a year.