In the United States, the value of agricultural land is a critical metric that influences not only the agricultural sector but also the broader economy. Key variables that have driven the increase in farmland prices over the last 10 years are cash rents, interest rates, commodity prices, property-specific qualities, and government policies. Understanding these variables is essential for farmers, investors, and policymakers alike. This blog post aims to unravel the various factors that play pivotal roles in determining farmland values, shedding light on why some plots command higher prices than others and how current trends are shaping the landscape of American agriculture.
1) Cash Rents
Historically, a clear correlation exists between the value of farmland and the cash rents charged. It stands to reason that as the cost of farmland increases, the rent for using the land correspondingly rises, because cash rent is primarily driven by net returns to the land. Similarly, the relatively strong net return to land during the last few years also strengthened working capital, an important source of funds when making down payments on farmland.
2) Interest rates
Capitalization rates play a pivotal role in determining the value of farmland. These rates hinge on several factors: the long-term rate on U.S. Treasuries, often referred to as the risk-free interest rate; inflation; and the risk premium that differentiates the long-term interest rate for land from that on U.S. Treasuries. Any fluctuations in these elements can lead to corresponding shifts in farmland's capitalization rate. Notably, farmland values share an inverse relationship with the capitalization rate, meaning that as the capitalization rate climbs, farmland values tend to drop.
In recent years, inflation has maintained a strong presence, significantly influencing the capitalization rate. Moreover, farmland is increasingly viewed as a solid hedge against inflation, thereby amplifying its appeal as an investment choice. Despite the pressure inflation places on interest rates, the unique dynamics between farmland values and inflation usually manifest in a positive correlation, underscoring the complex interplay that shapes the valuation of farmland in the face of economic variables.
3) Commodity Prices
Commodity prices significantly influence farm income, which in turn impacts farm revenue and real estate values. Although it's accurate that elevated commodity prices can lead to increased earnings for farmers, it's important to note that other variables, such as escalating input costs, can diminish overall net income. Farmland owners should track both input costs and commodity prices when tracking farmland prices to help predict budgets and investment expectations.
4) Property-Specific Qualities
Each piece of farmland is different. Factors such as soil type, soil quality, the availability of water, and whether or not the land is tillable are all factors that can affect the price of a specific piece of farmland. The presence of infrastructure and amenities, such as fencing, barns, access to utilities, and irrigation systems can also affect the value of a piece of farmland.
Locational aspects such as proximity to markets and transport infrastructure also play a significant role in determining the value of agricultural land. Farmlands closer to urban markets or with easy access to transportation networks tend to have higher values due to reduced costs and ease in distributing produce.
5) Government Policies
Government policies related to agriculture, subsidies, and taxes can have a significant impact on the price of farmland. Additionally, numerous government programs exist to financially support farmers, ranging from regenerative farming initiatives to federal crop insurance. Government policy often serves as a vital capital source for many farmers. During the pandemic, farms experienced a significant increase in income, attributed to enhanced funding for government programs. This influx of cash may encourage farmers to invest more in farmland, potentially driving up its value.
How to Determine the Value of Farmland
The National Agricultural Services (NASS) Land Values 2023 Summary released in August 2023 reported that the average farm real estate value (all land and buildings on farms) averaged $4,080 per acre, up $280 per acre (7.4%) from 2022. U.S. cropland value averaged $5,460 per acre, an increase of $410 per acre (8.1%) from 2022. Pasture value averaged $1,760 per acre, which is an increase of $110 (6.7%) from the previous year.
It is important to remember that the value of farmland varies across the country, and it is dependent on many different factors. Farmland owners can get a free property report from LandGate with a free estimate that breaks down the value of their land and its natural resources. The best way to determine the value of farmland for lease or for sale is to let the market determine its value by listing it on a competitive marketplace like LandGate, which exposes the property to a wide network of farmers, investors, and developers.
