Stephen Bolt, accredited rural appraiser and chief appraiser with AgChoice Farm Credit in Towanda, Penn., says U.S. farmland remains a "top choice" for long term investors.
Bolt said there are several factors positively influencing farmland values; stable increases in income and appreciation, profitability expectations about commodity prices, low interest rates and slow rates of inflation.
According to Bolt the growing popularity of farmland as an investment is also influenced by tax-free exchanges from land sales bordering urban areas.
"Demand for new housing and commercial property expansion is also influencing farmland values in more rural areas," he said. "To avoid capital gain tax, investors want to re-invest after a property sale into this same asset category. This is having a significant impact on demand in addition to price per acre."
Availability of quality land for sale is limited. "Landowners are not actively selling farmland like they did in the early 1990s," says Bret Cude, accredited farm manager and senior manager with Farmers National Co. in Nashville, Ill. "With farm mortgage loan rates at their lowest level in years, landowners have less incentive to sell and are therefore holding onto their land assets."
Cude expects the economy to strengthen over the next 12 months which should trigger increases in interest rates. "This will possibly slow down the rate of increase in farmland values, but other forces providing price strength for high quality ground are expected to remain true. That should aid in holding farmland values at a 3 percent to 6 percent annual increase," he says. "While this is good for current landowners, it still makes difficult for those looking to acquire more acreage.
Tighter cash flow
According to Cude, the new farm bill ensures profit gains for absentee landowners "The loss of loan deficiency payments (LDPs) combined with the new timelines for government payments are creating a tighter cash flow situation for operators," he says. "However, the new process for updating base acres and yields supports landowners in their justification to increase rent values."
Improved commodity prices and an expected return to optimal yields, the new farm bill and increasing farm sizes could push cash rents up 2 percent to 3 percent in high yielding crop regions, said Cude.
According to USDA Economic Research Service, farm real estate values averaged $1,210 per acre Jan. 1, 2002, up 5.2 per cent from the previous year. This is an $80 increase and continues the average climb in values that began in 1987.
Kevin Halfmann, accredited rural appraiser and president of Halfmann Appraisals in San Angelo, Texas, says agricultural land values across states and regions vary depending on land quality and competing demands for other uses, such as development.
"While much of the market value of agricultural land reflects the potential capacity to produce corps and livestock, non-farm factors such as recreation and urbanization most definitely influence market value," he says. "In states where farmland is in great demand for conversion to urban use, much of today’s market value can be attributable to non-farm demands."
For those landowners in the path of urban and commercial growth, many have experienced double digit increases in their land holdings.
"Today’s timing is ideal for all types of investors to consider farmland as an investment," said Halfmann. "Land represents the classic supply/demand situation in terms of presenting itself as a finite asset which produces the most basic human need for a rapidly growing population."
With heightened awareness of the new global economics of food, investors are increasingly recognizing U.S. farmland as a solid and under valued investment. And by investing in various regions of the country and in different crops and by purchasing properties of different sizes, farmland within a investor’s portfolio can be constructed to meet the most specific risk and return objectives," he concludes.