March 23, 2012
High crop and livestock prices certainly support the upswing in farm and ranch land values, but a new U.S. Department of Agriculture report outlines some of the other forces at work. The report, titled "Trends in U.S farmland value and ownership," notes that farm real estate accounts for a large share of total farm assets - 84 percent in 2009 - and the value of that real estate is subject to a range of economic factors.
Those factors include alternative investments, interest rates and debt-servicing capability, in addition to parcel-specific factors such as soil productivity, proximity to delivery points like grain elevators and highways and the land's development potential.
The report's authors note that while farm earnings since 2009 have supported the upswing in farmland prices and were more than sufficient to service debt on farm real estate purchased at current mortgage rates, farmland prices have at other times increased without proportionate increases in farm revenues. Between 1978 and 1985, and 2005 and 2008, farming income was insufficient to service debt on farm real estate purchases.
The report also notes that historically low interest rates are likely a significant contributor to farming's current ability to support higher land values. Higher interest rates would likely put downward pressure on farmland values.
The farmland rent-to-value (RTV) ratio is the cash rent per acre divided by the land value per acre and serves as an indicator of how quickly land would pay for itself. The report shows that the RTV ratio generally has declined for the past 45 years. In 1951, if agricultural rents were the sole source of returns from farmland, the farmland would have paid for itself in about 14 year. By 2007, that payoff period had grown to 33 years. The authors note, however, that non-agricultural returns from development or other activities play a role, making decreasing RTV ratios consistent with the growing importance of non-agricultural factors in determining land values.
A summary of the report, as well as the full report, are available at www.ers.usda.gov/publications/eib92/
Reprinted in part from Drover's CattleNetwork.com