Big-picture influencers that affect land worth
Soil type, drainage and location all play into the dollar value of your farmland. But as the agricultural industry becomes more global, so do the dynamics that impact your farm.
"In agricultural economics, a lot of issues are linked together," says David Kohl, professor emeritus of agricultural economics at Virginia Tech. "Sometimes you have to take a step back, think strategically and connect all of the dots."
"People have an intuitive sense of what their land is worth," notes Tim Hopper, chief economist at TIAA-CREF, a financial services and investing organization. Yet to stay ahead of the curve, farmers should think beyond their farm gates, he says. The following 10 macro influencers
offer food for thought as you gauge the value of your farm.
1. Global population growth. The world’s population is forecast to reach 9 billion by 2050. While that is a significant increase from the current 7 billion, Hopper says the key issue is population distribution.
"The areas of the world that have growing populations and caloric needs also have increasing incomes," he says. But in many of those places, agriculture cannot expand to meet this growing demand. As a result, the productive land in other regions of the world increases in value.
2. Water. Like population, water is not dispersed evenly around the world. Hopper says trade allows us to move products from where we have water to where we need water. "Trade in crops is basically trade in water," he adds.
While water issues are more pronounced in other areas of the world, recent prolonged U.S. drought conditions have made water supply a national hot topic. Kohl says water availability, either through irrigation or drainage, will factor into farmland value. "Top-quality farm ground, with water under it or near it, is a premium," he says.
3. Wall Street. High farmland returns have attracted the interest of investors, landowners, lenders and operators, adding more competitors at farmland auctions. After 2008, several funds realized a lot of their diversified portfolios weren’t as stable as originally thought, says Bruce Sherrick, University of Illinois professor of agricultural and applied finance.
While Wall Street types like several aspects of the farmland and agricultural markets, it’s not an easy industry for outsiders. "There’s not a financial ticker for farmland," he says. "A parcel of land requires some specific knowledge to run." He says farmland investments don’t tend to add additional return. More often, they reduce risk.
4. Interest rates. For the past few years, many farmers have been able to purchase land with loans at extremely low interest rates—recently as low as 1%—but most rates have been closer to 2.5%. Long term, Hopper says, interest rates will level out at around 4.5%.
Any major change in monetary policy could alter farmers’ and investors’ attitudes about future land purchases. When considering changes in policy, Virginia Tech’s Kohl likes to factor in the 320/260/60 rule. "Around 320 million people live in America with 260 million of those living in urban areas," he says. "Only 60 million are left in rural America. A lot of our economic policy will be based toward the 260 instead of the 60."
- January 2014