Farm Real Estate
and Farm Finance
Farm real estate is the major asset on the farm sector
balance sheet, accounting for nearly 79 percent of total
U.S. farm assets in 2000.
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
The rapid increase in farmland values during the 1970s and early
1980s was followed by a sharp decline during 1982-87. The slow upward
trend beginning in 1987 began to accelerate in 1994.
Since 1987, average U.S. farm real estate values have rebounded
102 percent, from $599 per acre to $1,210 per acre in January 2002.
In real or inflation-adjusted terms (1982 dollars), this amounts
to a 39-percent gain.
It was not until January 1995 that the average nominal value per
acre surpassed the previous record high of $823 set in 1982. Even
now, though, the real (inflation-adjusted) value is still 23 percent
below the 1981 peak.
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 2002, the Northeast farm production region had the highest
value of land and buildings, at $2,810 per acre, due in large part
to the expected value of agricultural land for future nonagricultural
uses. New Jersey had the highest average value of any State, at
$8,000 per acre.
At the other extreme, farmland values in New Mexico, which contains
large amounts of low-value rangeland, averaged $220 per acre.
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.
Recent 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 urbanized States, such as Delaware, New Jersey,
and Maryland, cash rent-to-value ratios are relatively low (often
0.01-0.03), indicating that the average market value reflects a
substantial amount of nonfarm demand.
In contrast, rent-to-value ratios of 0.065 to 0.10
occur for States in the Northern Plains and Corn Belt, where market
value is largely determined by the value of the land for agricultural
use.
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