ORLANDO (ResourceInvestor.com) -- Over the past half century, U.S. farmland prices rose though two long bull markets, punctuated by a short, severe crash. Farmland rents have kept to a narrower range, centered around 7%+ of land value.
Farmland prices paced or exceeded monetary inflation through most of the period. Since the CPI has been severely diluted by geometric averaging and hedonics, an alternative CPI measure from Shadow Government Statistics is shown for comparison (see chart below).
Other forces were at work as well. The Farm Boom period of the 1970s was sparked by a tightening world grain supply which led to soaring prices and predictions of famine. I recall a grim symposium talk closing with the words: “Decisions are being made right now that will determine who will eat!”
One wise decision was to fund more research into hybrid crops, leading to the “miracle grains” which eventually eased supplies. In the meantime, U.S. farmers were encouraged to plant “from fencerow to fencerow.”
The Farm Crisis of 1982-87 came during a recession, with falling commodity prices, double digit interest rates and widespread variable-rate financing. An Iowa friend lost his first farm when its floating rate mortgage was foreclosed - by the same banker who assured him two years before that farmland would always go up.
Sources: Whole Farm Value, SGS Alt CPI CPI-U, Consumer Price Indexes (CPI) and State USDA Ag Land Values.
Rents rise slower than land prices, squeezing the rent:value ratio when prices are rising quickly. Declines come slower as well; from their peak in 1984 to the depths of the farm crisis, average rents fell only 30%.
Rent:value measures only gross income. Net return will be lower by 1-2 percentage points, depending on taxes, insurance costs and management fees. Our farm netted about 6% in the first years; last year it was just under 5%. I think of it as an idealized TIPS bond: very secure, with a coupon of 5%+ and the principal indexed to real inflation, rather than a distorted CPI.
In the universe of real estate investments, 5%-6% is not a stellar return. But properly managed cropland does not depreciate, and the risk of “vacancy” is minimal for good quality land. Its location value is secure, even if peak oil drives the massive re-localization which many are predicting.
Is the current uptrend in land prices setting the stage for another crisis? It seems unlikely, given that fixed rate financing is widely available and interest rates are far lower than during the 1980s.
As of 2002, 74% of Iowa farmland is not mortgaged. However, some of the residential / commercial real estate bubble may be seeping into the farmland market. About 39% of the Iowa cropland that changed hands in 2005 was bought by investors rather than farmers or agribusinesses.
On the other hand, ethanol demand has boosted grain prices. Currently wheat is priced at $4.92 per bushel, corn is at $3.74 per bushel and soybeans are trading at around $6.51 per bushel on CBOT. Throughout the summer into fall, prices went parabolic.
Ethanol plants have sprung up all over the Midwest, providing farmers a handy alternative for marketing the crop. Less crop drying is required and transport costs have far less impact on the price paid.
In addition, world grain supplies, measured as days of supply, have dwindled to the levels of the early 1970s. Another farm boom period could be possible.
