10 Factors that Drive Farmland Value

06:06AM Dec 13, 2013
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Here are the big-picture issues that affect the worth of your farm

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 factors impacting 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 step back, think strategically and connect the dots."

"People have an intuitive sense of what their land is worth," says Tim Hopper, chief economist at TIAA-CREF, a financial services and investing organization. Yet to stay ahead of the curve, he says, farmers should think beyond their farm gates. Here is some food for thought on the macro issues that affect your farm’s value.

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 people, 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. Therefore, productive land in other areas 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 says.

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 ag markets, it’s not an easy industry for outsiders. "There’s not a ticker symbol for farmland," he says. "A parcel of land requires some specific knowledge to operate." He says farmland investments have historically added return and have reduced risk, though the risk impacts are often more important".

4. Interest rates

For the past few years, many farmers have been able to purchase land with loans at extremely low interest rates. Long-term, Hopper says interest rates average around 4.5%. Today, he says, interest rates average around 2.5%, and recently they were closer to 1%.

Any major change in monetary policy could alter farmers’ and investors’ attitudes about future land purchases. When considering changes in policy, 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."

5. Shale energy

Like water, the potential of what’s under your land might become more important than the soil on top. Vast shale plays in many areas of the country are now accessible through horizontal drilling and hydraulic fracturing.

"The shale energy revolution is tremendous in the U.S.," Hopper says. "The U.S. is now the largest producer of oil and gas in the world. We are still importing, but our trade deficit is starting to shrink."

6. Foreign exchange rates

A strong U.S. dollar equals more value for U.S. products, but it also means U.S. products are more expensive to foreign buyers. Hopper says since capital is scattered in the world, currency exchange rates greatly impact land values.

A falling dollar equals high commodity prices, which raise farmer profits and increases rent and land values. On the flip side, he says, a rising-dollar environment lessens farmland values.

7. Regulation

Whether dealing with banking, ethanol mandates or animal welfare, regulations are an invisible threat for U.S. farms, Kohl says. As a dairy producer, he has seen how quickly a new rule or regulation can cause major problems – even with his own operation. He says producers must be proactive.

Hopper agrees and says staying up-to-date on U.S. regulations is vital, as they can easily create a domino effect. "There are many countries that take U.S. regulations, put their own stamp on it and enact it into law," he says.

8. Wine

Why would wine make this list? "I call it the $4.99 box of Gallo revolution," Hopper says. "Wine consumption in the U.S. is going up about 14% per year, and in the world it is going up about 4% a year."

Demand drives change and now the U.S. is the largest wine consumer in the world. "This is a tremendous shift that has led to a change in the dynamics of the price of land," Hopper says. By comparison, he says, an acre of corn valued at $12,000 in the Midwest translates into an acre of grapes valued at $100,000 in the heart of Napa.

Don’t expect to see corn fields converted to grapes any time soon, but when you consider wine is now produced in all 50 states, there is potential. "Land value is determined by the value of what you can produce off that land," Hopper says.

9. The rise of China

China as a population center, buyer of U.S. goods and global player is top-of-mind for the ag industry. Hopper says one of China’s biggest problems is lack of rainfall. China encompasses 20% of the earth’s population and 7% of the earth’s water resources.

"How do you feed 20% of the world’s population on 7% of the world’s rainfall?" Hopper asks. "You don’t; you import." He says the country is becoming more urbanized, which equals more food demand and fewer resources to produce food. "Now China is trying to buy areas that can produce food," he says.

10. Global trade

As incomes around the world have increased, especially in China and other emerging nations, Hopper says trade with the U.S. has also increased. While more demand is positive for ag markets, Hopper says this shift has led to stresses on agriculture. "We’ve seen increased commodity price swings and more volatility," he says.

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