Farm Real Estate
Farm real estate (include land and buildings) is the major asset on the farm sector balance sheet, accounting for nearly 84 percent of total U.S. farm assets in 2009.
In addition to being the largest single investment item in a typical farmer's portfolio, farm real estate is the principal source of collateral for farm loans, enabling farm operators to finance the purchase of additional farmland and equipment or to finance current operating expenses. For additional information, see the explanation of farm assets, debt and wealth in the Farm Income and Costs Briefing room.
Trends in Farm Real Estate Values
Farmland values rose throughout much of the post-World War II period. Real farmland prices increased 92 percent from 1969 to 1981, as agricultural producers responded to high returns and federal policies encouraging investment in agriculture. After 1981, farmland values began to decline in response to rapidly rising interest rates and higher energy prices. Since the farm crisis of the mid-1980s, farmland real estate values (including land and buildings) have been rising in both nominal and real (i.e., inflation-adjusted) terms. Between 1994 and 2004, real values increased between 2 and 4 percent annually, and in 2005 and 2006 increased by 16 percent and 10 percent respectively. Since then, real growth in farmland values has slowed, but is still increasing by 3 to 5 percent annually. States in several regions, including the Corn Belt and Great Plains, experienced double digit growth between 2010 and 2011, while many States in the Southeast and Northeast experienced declines.
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Agricultural land values vary across States and regions depending on the inherent quality of the land for agricultural production, and on competing demands for other uses, such as development. As of January 2010, the Northeast farm production region had the highest average value of farm real estate, at $4,690 per acre, due in large part to the expected value of agricultural land for future nonagricultural uses. Rhode Island had the highest average value of any State, at $13,600 per acre. At the other extreme, farmland values in New Mexico, which contains large amounts of low-value rangeland, averaged $480 per acre. The average for the coterminous 48 States was $2,140.
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For additional information, including historical data for States
and counties, see:
Federal Commodity Program
Payments and U.S. Farmland Values
Since the 1930s, Federal policy has exerted significant indirect
influence on cropland values through capitalization of income from
commodity supply control programs. Because farmland values are closely
tied to the income-generating capacity of the land, payments from
Federal farm programs have had a positive effect on farmland values.
Previous analyses of the wheat, corn, cotton, and Conservation
Reserve Programs all indicate that these programs have a positive
effect on farmland values, but the magnitude of that effect is often
debated.
Analysis
indicates that just prior to the 1996 Farm Bill, the largest relative
effect of direct payments from farm commodity programs occurred
on cropland values in the Northern Plains. Further
analysis shows that much of the increase in government payments
accrued to landlords in the form of higher rents.
For additional information, see "Evidence of Capitalization of
Direct Government Payments into U.S. Cropland Values," American
Journal of Agricultural Economics, 79 (5), 1997: pp. 1642-1650
(C.H. Barnard, G. Whittaker, D. Westenbarger, and M. Ahearn).
Urban Influence and
Farmland Values
While much of the market value of agricultural land reflects potential capacity to produce crops and livestock, nonfarm factors such as recreation and urbanization potential also influence market value. In States where farmland is in great demand for conversion to urban use, much of the market value of farmland is attributable to nonfarm demand.
The importance of this effect can be seen by comparing cash rent-to-value ratios. Cash rents are believed to be good indicators of current annual agricultural returns, while market value includes the effect of nonfarm influence.
In more urbanized States, such as Delaware, New Jersey, and Maryland, cash rent-to-value (RTV) ratios are relatively low (often 0.01-0.03), indicating that the average market value reflects a substantial amount of nonfarm demand. In contrast, RTV ratios of 0.065 to 0.10 occur for North Dakota (in the Northern Plains) and Iowa and Illinois (in the Corn Belt), where market value is largely determined by the value of the land for agricultural use. After declining in the 1970s when land prices were escalating, rent-to-value ratios rebounded in the Northern Plains and Corn Belt States.
Survey data collected by USDA's National Agricultural Statistics Service shows that since 1999, almost every USDA region has seen a decrease in RTV ratios. The Lake States and Southern Plains experienced the largest relative decrease in RTV ratios, a decline of 48.3% and 51.2%, respectively. The Delta and Mountain regions had the lowest relative (percentage) decrease in RTV ratios between 1999 and 2008, 4.2% and 8.8%, respectively. Some experience larger levels of volatility in the RTV ratios, especially in the Delta, Mountain and Pacific regions (more farmers in these three regions use irrigation, and some of the volatility could be due to our averaging of irrigated and non-irrigated rents and land values). The areas with the highest RTV ratios are the Northern Plains, Delta, Mountain and Pacific regions. The Corn Belt and Lake States are closer to the national average. The Southeast, the Southern Plains, Appalachia and the Northeast all have lower RTV ratios.
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