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RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Farm Income 4th On List of Reasons to Purchase Farmland

Sep 08, 2013

The Kansas City Federal Reserve puts out a quarterly survey on credit conditions in their region and the latest survey for the second quarter had some interesting trends. Due to lower wheat prices and the continuing high feed costs, their farmers actually had lower-income for the quarter. However, farmland prices continued their upward trend, up about 25% for irrigated cropland year-over-year and about 18% for non-irrigated cropland. Even rangeland prices were up about 14%.

However, for me, the interesting nugget out of these farmland price increases is the reasons why listed in order:

  • The wealth effect - farmers have had several years of high income which has increased their wealth substantially, leading to a desire to purchase more farmland and more importantly, having the wealth to purchase more farmland,
  • The current low-interest rate environment - With rates at decade lows, it is much easier to purchase farmland at higher values and still have it cash flow. If rates go back to more normal levels, this effect will reverse,
  • Lack of alternative investments - With CD rates at 1% or less, farmers are more likely to purchase farmland that will return more than that rate and still have some upside potential,
  • Finally - farm income expectations - The income generated by the farmland is the 4th reason for purchasing farmland. Over time, this reason should revert back to #1 and in that case, the first three reasons may lead to lower prices, not higher.

 

The quarterly survey is always interesting to read and I highly recommend taking a look at it. It is only five pages long and whether you live in that region or not, you will find something interesting in it each time.

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COMMENTS (2 Comments)

swmnag - Marshall, MN
How is this not a huge red flag for a bubble in farmland value? The only thing that pays for land is the income the land produces. This is pure speculation on the part of farmers (and investors). There is some truth in the alteranative investment category, but the difference with a CD and farmland is that there is very little risk of losing money on a cd. Whereas there is a very high likely hood of losing 25-50% of the principal value of the farmland purchase. If the land can't produce income to pay for itself, then you must sell it, and sell it at a lower value. Sounds like a smart "investment".​
9:11 AM Sep 9th
 
swmnag - Marshall, MN
How is this not a huge red flag for a bubble in farmland value? The only thing that pays for land is the income the land produces. This is pure speculation on the part of farmers (and investors). There is some truth in the alteranative investment category, but the difference with a CD and farmland is that there is very little risk of losing money on a cd. Whereas there is a very high likely hood of losing 25-50% of the principal value of the farmland purchase. If the land can't produce income to pay for itself, then you must sell it, and sell it at a lower value. Sounds like a smart "investment".​
9:11 AM Sep 9th
 

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