What do you call a dairy farm willed to the kids? Child abuse. That's an old joke about the younger generation's aversion to the unprofitable and unglamorous trade of farming. But with farmland values on the rise, and the housing market flatlining, U.S. farmers may get the last laugh.
Farm real estate prices began climbing steadily in the late 1980s after land values hit rock bottom during the "Farm Crisis." According to the U.S. Agriculture Dept., U.S. farmland values increased more than 200% between 1987 and 2006, from an average of $599 per acre to $1,900 per acre. In 2005, farmland values rose 15.4% (2006 data comes out in August), driven by historically low interest rates, demand for non-agricultural use (condos, office buildings, malls), and growing interest from investors.
This is welcome news for many farmers and the agricultural industry as a whole. "The price of farmland is the best barometer of the economic health and wealth of the farm economy," says Loyd Brown, president of Hertz Farm Management, an Iowa-based farmland consultant, appraiser, and realtor.
The most expensive farmland, defined by the USDA as land with at least $1,000 in annual agricultural income, is still in the Northeast, California, Florida, and Virginia, where prices followed the trends of the last real estate boom. Rhode Island's farmland, the priciest in the country, averaged $12,500 per acre as of January, 2006, up 11.6% from the year before.
"Though it has plateaued lately, it's been a generally strong market and farmland gets caught up in all that," says Ken Ayars, chief of the Rhode Island Environmental Management Dept.'s agriculture division.
In the Northeast, which boasts 7 out of the 10 states with the most expensive farmland, and particularly in tiny Rhode Island, farms cost more because land is scarce. The high concentration of urban areas in the region also adds to its appeal. With cities so close, farmers can sell produce at retail prices at city markets and save a fortune on transportation costs.
Ongoing 1031 tax-free exchanges have also influenced the jump in values in farmland that is near cities. Provision 1031 of the tax code allows sellers to avoid incurring capital gains on a property traded for a like investment. Because land is scarce in urban areas, developers will pay top dollar for suburban farmland. Farmers are taking advantage of this and using the newly earned money to buy land farther away from city centers.
There is another, more subtle force fueling rising farmland prices in the Northeast and throughout the U.S., a trend Ayars calls a "post-9/11 phenomenon." More and more urban professionals are buying rural properties where they can raise a small number of animals, grow organic vegetables, or make honey for extra income, while maintaining their city jobs or another small business from home.
The situation is different in places like California's Napa and Simi valleys. In the 19th century, farmers in the area grew crops as diverse as wheat and prunes. It wasn't until the second half of the 20th century that the area became recognized as one of the world's premier viticultural regions. As more and more wineries established themselves, prices for the best acreage skyrocketed. According to John Bergman, a wine country realtor, the average price of an acre of land in Napa Valley has grown from $2,000 in 1960 to $143,000, an increase of more than 7,000%.
Adding a further strain is the growing desire of wealthy developers and weekenders to buy up farmland and then build homes on it. In many formerly predominantly agricultural areas such as the Hamptons on New York's Long Island, which used to be famous for its potato harvest, many acres of farmland have been divided into residential lots.
But the most current and perhaps most riveting farm real estate story is unfolding in the Midwest, where farmland values have appreciated dramatically in the past year thanks to record-high prices of corn. Increased demand for ethanol fuel, which is made by fermenting corn kernels, thrust the price of corn up from $2.50 a bushel in September, 2006, to a 10-year high of more than $4.50 on Feb. 26.
Farmland prices in Iowa, the country's biggest ethanol producer, surged 13.6% between September, 2006, and March, 2007, adding to a total year-over-year increase of 16.5%, the second-highest rate in 20 years, according to the Iowa Farm & Land Chapter No. 2 Realtors Land Institute. The value of the state's best farmland, which produces 160 bushels of corn an acre, rose to an average of $4,300 per acre from $3,800 between September and March. Farmland prices in Nebraska and Indiana have also seen double-digit growth in the past year.
"This is the greatest increase over the shortest period of time since cotton was king," says John McAllister, president of the Chicago-based Realtors Land Institute and a farmland consultant in South Carolina. McAllister says his 79-year-old father, who was also in the farm real estate business, does not recall seeing this great a shift in agricultural land prices in such a short period of time in his lifetime.
Most corn farmers are giddy about the runup in land value — they're making more money and, with the added equity, their balance sheets look shinier. "For no additional work, you've got extra cash flow," says Bob Thompson, a partner at Bryan Cave in Kansas City, Mo., who has represented ethanol farmers and also runs his own commercial cattle farms in Kansas and Missouri.
Flash in the pan?
Ethanol does have its fair share of adversaries: among them, livestock farmers who must now pay much more for corn feed. "It's a two-edged sword," says Thompson of rising corn prices.
The recent dip in corn prices may placate livestock farmers for a while, but the ethanol boom responsible for Midwest farm real estate appreciation is a more permanent influence than, say, the weather fluctuations that have controlled corn prices in the past. "It's not just a flash in the pan — it's a new mega-market," McAllister says.
The 2005 Energy Policy Act mandates that renewable fuels make up 5% of gasoline by 2012, and in his State of the Union address in January, President Bush called for a fivefold increase in ethanol fuel production by 2017. The USDA reported recently that U.S. farmers will plant 90.5 million acres of corn in 2007 to meet ethanol demand, a 15% increase from last year and the most since World War II. Monsanto, the world's largest seed company, said on Apr. 4 that its second-quarter earnings rose 23%, boosted by demand for corn seed.
Even if ethanol demand subsides, or an alternative source for the renewable fuel, such as woody biomass or cellulose waste, replaces corn, farmland price appreciation could endure. As the nation's population increases (the U.S. Census Bureau has said it could hit 400 million or more by 2040), so will demand for food, energy, and space.
McAllister still believes farmland is a good value right now. "I think land is a good investment, period," he says. "Maybe this [runup] is just a correction to an inefficient market. There has not been an adequate amount of credit given to the contributions made by Midwest agriculture in the past."
And if the rural real estate boom persists, U.S. farmers, who produce 42% of the world's corn, may even convince the kids to come back to the farm.
Copyright © 2012 Bloomberg L.P.All rights reserved.