Abstract—Farm real estate values and
cash rents are important indicators of the financial condition of
the farm sector. Real estate comprises a substantial share of the
asset portfolio of farm households. Farm real estate values are
influenced by net returns from agricultural production, capital
investment in farm structures, interest rates, government commodity
programs, property taxes, and nonfarm demands for farmland. Values
have been steadily rising since 1987, but the inflation-adjusted
(real) value of U.S. farm real estate is still below its 1982 peak.
Cash rents have also been increasing in recent years.
Farm Real Estate Values
Farmland values rose rapidly during the 1970s and early 1980s, followed
by a sharp decline during 1982-87, then a slow upward trend beginning
in 1987 (fig. 1.2.1). Since 1987, average farmland values in the
Nation have increased 127 percent, from $599 per acre to $1,360
in January 2004. In real or inflation-adjusted terms (GDP deflator),
however, this amounts to a 53-percent gain. It was not until January
1, 1995, that the average nominal value per acre surpassed the record
high of $823 set in 1982. But the January 2004 average is still
8 percent below the 1982 average on a real (or inflation-adjusted)
basis.
The 7.1-percent nominal increase in the national average value
of agricultural real estate during 2004 marked the 17th consecutive
increase since 1987. Over the previous 4 years, in particular, farm
real estate values had increased substantially in all U.S. regions
(table 1.2.1). Most notable is a 42-percent increase in the Lake
States, versus 25 percent for all regions combined.
Table 1.2.1 - Farm real estate values, by farm
production region, January 1 for selected years
Region
1982
1987
2000
2001
2002
2003
2004
$/acre
Northeast
1,367
1,491
2,660
2,830
3,000
3,200
3,400
Lake States
1,234
707
1,560
1,700
1,870
2,010
2,220
Corn Belt
1,642
900
1,890
1,950
2,030
2,130
2,300
Northern Plains
547
331
535
556
576
594
632
Appalachian
1,083
1,004
1,990
2,120
2,250
2,370
2,500
Southeast
1,095
1,055
1,920
2,030
2,140
2,270
2,420
Delta States
1,135
757
1,270
1,330
1,390
1,490
1,550
Southern Plains
576
532
672
715
755
788
832
Mountain
325
257
448
471
500
523
550
Pacific
1,346
1,084
2,000
2,120
2,240
2,350
2,480
48 States
823
599
1,090
1,150
1,210
1,270
1,360
Source: National Agricultural Statistics Service,
USDA.
The increases were widespread, with most States exhibiting increases
for farm real estate, cropland, and pasture. As of January 2004,
several Northeast States continued to record the highest average
per-acre values for farm real estate, with Connecticut and Rhode
Island exceeding $10,000 per acre (fig. 1.2.2). These values reflect
continued pressure from nonagricultural sources for conversion to
residential or other urban-related uses. The high values in States
such as California, Florida, Ohio, Illinois, Indiana, and North
Carolina are the consequence of urban pressures, the production
of high-value crops, or high soil fertility. The low real estate
values for many States in the Northern Plains, Southern Plains,
and Mountain regions can be attributed to large amounts of arid
rangeland and less productive cropland. New Mexico, Wyoming, and
Montana recorded the lowest average values per acre.
Figure 1.2.2 - Farm real estate value per acre, January 1, 2004
Source: National Agricultural Statistics Service, Sp Sy 3 (04),
August 2004.
Cash Rents
Nearly a third of U.S. farmland is operated under some form of lease,
according to the 2002
Census of Agriculture. The most common form of lease, the cash
rental agreement, is a fixed payment negotiated before planting.
Share rental agreements, by contrast, vary with the amount of product
harvested. Under cash rental arrangements, the tenant bears all
of the production and market-price risk; share rental arrangements
divide production and market risks between tenant and landlord.
Cash rents are generally considered a short-term indicator of the
return to a landowner's investment. To tenants, though, cash
rents are a major production expense and, like farm real estate
values, have been increasing for a number of years (fig. 1.2.3).
Because rents reflect the income-earning capacity of the land,
they vary widely across the country. Cropland rents tend to be highest
in areas where higher-value crops are grown. The highest average
cash rents in 2004 were reported for irrigated land in California,
at $300 per acre (fig. 1.2.4). California produces large quantities
of high-value specialty crops, vegetables, fruits, and nuts. Cropland
most suitable for corn and soybean production, principally in the
Midwest, also commands high rents. The highest rents for nonirrigated
cropland in 2004 were reported as $126 per acre in both Illinois
and Iowa (fig. 1.2.4).
Figure 1.2.4 - Average per-acre cash rent for irrigated
and non-irrigated cropland, 2004, selected States
Source: National Agricultural Statistics Service, August 2004
During 2004, average cash rents for pasture varied from $37 per
acre in Wisconsin to $1.70 per acre in New Mexico. States in the
Appalachian, Delta, Southern Plains, and Pacific regions uniformly
recorded increases from 2003.
Grazing Fees
Grazing fees for use of pasture or rangeland are also a form
of cash rent, except that payment is based on "grazing units"
rather than tracts of land (acres). A grazing unit is defined on
an animal-unit-month (AUM) basis, which is one cow or cow-calf
pair, or seven sheep/goats, feeding for 1 month (NASS, 2005). Grazing
fees on public lands administered by the Bureau of Land Management
(BLM) of the U.S. Department of the Interior, and the Forest Service
(FS) of the U.S. Department of Agriculture (USDA) are set by law.
These fees vary annually according to a legislated formula, which
links the fees to changes in the cost of production. As a result
of the formula, 2005
grazing fees on public land were set at $1.79 per AUM. That
marks the second consecutive year in which grazing fees were set
above the statutory minimum $1.35 per AUM.
Grazing rates on privately owned nonirrigated land in 16 Western
States averaged $14.30 per AUM in 2004. Rates ranged from $7 in
Arizona and Oklahoma to $23 per AUM in Nebraska. Private grazing
rates have trended upward since the early 1990s.
Factors Affecting Farm Real Estate Values
Traditionally, farmland value was based on its agricultural productivity.
Particularly in the more rural areas of the Nation, where farmers
still account for most farmland purchases, net returns to agricultural
uses are the principal determinant of farmland value. Interest
rates, capital investment in farm structures, and many other factors
also influence productivity and thus the agricultural value of
farm real estate. But today, many factors unrelated to productivity—including
urban influence, government program payments, and rural amenities—contribute
to the value of land in rural areas. In fact, these factors may
be more important than productivity. High levels of direct
government payments, which have occurred particularly since
1999, may have influenced farmland values in some regions.
Urban Influence
Farmland near cities has seen its value inflated by demand for conversion
to nonfarm uses. As the U.S. population continues to grow and disperse,
even primarily rural States such as Iowa are experiencing urban-related
influences on farmland values. Commuters, who can now travel farther
or even telecommute, are often willing to pay more than agricultural
value in order to live in primarily rural areas. Other families
develop hobby farms, second homes, or recreational structures in
rural areas. In Iowa, for instance, there are now more nonfarmers
living in rural areas than there are farmers. (See AREI
Chapter 1.1) Other nonagricultural factors that may contribute
value include the potential to concurrently use farmland for fee-based
hunting, fee-based recreation, or wildlife viewing.
Nonfarm influences on agricultural real estate values have gained
increased attention as interest in farmland preservation, suburban
"sprawl," and habitat conservation has grown. Recent
research indicates that nonfarm
influence accounts for 25 percent of the market value of U.S.
farmland (Barnard, 2000). An ERS
report recently addressed issues surrounding development of
new houses, roads, and commercial buildings at the fringe of existing
urban areas. This "sprawl" into the countryside can
intersperse sometimes incompatible urban-related development with
existing agriculture. Metropolitan Statistical Areas (MSAs) contain
20 percent of U.S. land area and 80 percent of U.S. population (Bureau
of the Census, 2000). The area also contained more than a third
of all U.S. farms in 2003 and produced about a third of
agricultural production value.
Direct Federal Payments
An array of government policies influence the income derived from
farmland, and hence its value. Federal commodity and conservation
programs are the most obvious. But also important are farm credit
programs, State and local zoning regulations, habitat and species
protection laws, infrastructure development (such as roads and dams),
environmental regulations, and even property and income tax policy.
Previous research has shown that capitalization of expected payments
increases cropland values (Barnard et al., 2001). Also, the degree
to which direct Federal payments are capitalized into cropland values
depends upon the issuing program (Goodwin and Mishra, 2003). If direct payments
are capitalized into cropland values, as many theorize and some
research has demonstrated, then a reduction in payments could signal
a decline in cropland values and a loss of wealth for landowners.
Further, ERS estimates that the degree to which direct payments
(even from the same program) are capitalized into cropland values
varies widely, with capitalization greatest in the Northern Plains.
So from a policy perspective, the effect of program changes on cropland
values would vary depending on the dominant program crop in a region.
Other Market-Related Factors
Interest rates, particularly inflation-adjusted ones, are especially
important determinants of U.S. farmland values. As proxies for the
discount rate, interest rates determine the current value of expected
future earnings from land: for a given pattern of future earnings,
higher (lower) interest rates imply lower (higher) land values.
During much of the mid- to late 1970s, real interest rates were
actually negative, providing a strong incentive to borrow money.
Some of the borrowed money was used to purchase rapidly appreciating
farmland. Conversely, real interest rates jumped from 1981 to 1985
when nominal interest rates increased rapidly just as expectations
of future inflation were diminishing. The resulting increase in
the real interest rate of mortgages has been cited as a cause of
the slide in farmland values in the early and mid-1980s.
Inflation, lending policies of farm credit agencies and banks,
and speculation also affect farmland values. And of course farmland
values vary by site-specific characteristics like access to major
highways, proximity to commodity and input markets, aesthetic appeal,
and homesite potential.
Nonmarket Public Goods Provided by Farmland
Farmland also provides nonmonetary benefits. Until recently,
these
"rural amenity" benefits were supplied in such abundance
that they were rarely acknowledged. But as the Nation becomes more
urbanized, with the concomitant loss of farms and interspersion
of urban-related activities, the decrease in those amenities has
become a source of concern. The nonmonetary benefits potentially
reduced or eliminated by loss of farmland and open space include
recreation opportunities, aesthetic enjoyment from viewing landscapes
and wildlife, environmental quality, and nostalgia related to the
historic and cultural significance of rural life. It is these "rural
amenity" benefits that many farmland preservation programs
seek to protect.
A more extended discussion is available in AREI
Chapter 5.6, Farmland Protection Programs, an ERS report on
Rural Amenities,
(McGranahan, 1999) and current ERS activities examining farmland.
References
American Farmland Trust (1997). Saving American Farmland: What
Works. Northampton, MA.
Barnard, C.H., R. Nehring, J.T. Ryan, and R. Collender (2001).
"Higher Cropland Value from Farm Program Payments: Who Gains?"
Agricultural Outlook, U.S. Dept. of Agr., Econ. Res. Serv.,
AGO-286, Nov.
Barnard, Charles H. (2000). "Urbanization Affects a Large
Share of Farmland," Rural Conditions and Trends,
U.S. Dept. of Agr., Econ. Res. Serv., Vol. 10, No. 2.
Federal Reserve Bank of Kansas City (2000). Survey of Agricultural
Credit Conditions. Dec. 31.
Goodwin, Barry, and Ashok Mishra (2005). "Another Look at
Decoupling: Do Direct Payments Affect Production Decisions."
2005 AAEA annual meetings, Providence, RI.
Heimlich, Ralph E., and William D. Anderson (2001). Development
at the Urban Fringe and Beyond: Impacts on Agriculture and Rural
Lands. U.S. Dept. of Agr., Econ. Res. Serv., AER-803, June.
McGranahan, David A. (1999). Natural Amenities Drive Rural
Population Change. U. S. Dept. of Agr., Econ. Res. Serv., AER-781,
Sept.