“As volatile grains
compete for acreage, urban sprawl continues to spread, and
conservationists set land aside, bovines may be the ones left
out,” said analysts with the Agricultural Marketing Service in
September. “Last fall’s corn market and this summer’s wheat
rally is putting the squeeze on the grazing and hay production
portion of our nation’s available agriculture acres.”
That’s akin to saying a new horse might test a fence.
According to the
annual 2007 Land Value and Cash Rents Summary from the National
Agricultural Statistics Service published in August pasture
value has more than doubled since 2000-$1,160 per acre for the
national average this year, compared to $531 per acre in 2000.
Cash rents for pasture have increased 41% during the same period
of time. Pasture cash rents averaged $12 per acre this year,
which was $1.20 more per acre than in 2006.
On a regional
basis, the Pacific States posted the most increase in pasture
value this year, up 29.1% at an average of $1,732 per acre
($2,820 in California), compared to 16.0%) nationally. A little
further east, the average value in the mountain states increased
18% ($689 per acre).
Pasture lease rates follow suit, to a degree. Average pasture
rental rates are cited at $17.30 per acre in the Pacific States
($14.00 in California). It was $6.20 in the Mountain States,
with Utah the highest of those at $12.00 per acre.
Average cropland
value has increased 89% since 2000, from $1,460 to $2,700 this
year. Unsurprisingly, the largest year-to-year increase occurred
in the Corn Belt—63.8% since 2003, from an average of $2,270 to
$3,720. Cropland values in Iowa alone increased 17.4% since last
year, up from $3,310 per acre to $3,650.
Regionally,
cropland values in the Pacific states increased 12.4% this year,
to $5,450. The $9,780 per acre average price in California this
year was only behind New Jersey ($11,900), Arizona ($10,800) and
Delaware ($9,900).
“The increase in
farm real estate values continues to be driven by a combination
of many factors, which include strong commodity prices and farm
programs, outside investments, favorable interest rates and tax
incentives, and continued commercial and residential
development,” explains the report.
Value in the Eye of Beholder
Competition from within the agricultural industry is no secret.
America’s fascination with fixing the nation’s dependence on
foreign oil via heavily subsidized domestic ethanol
production—itself a resource-intense process—saw more acres
placed into corn production this year than at any time since
World War II. As the harvest began in September early
expectations were for this year’s crop to be the second largest
in history.
In response, cattle
feeders and growers are looking to dilute rising cost of gains
by gleaning more pounds from growing forage. That opportunity
may be limited, however. In addition to the growing competition
for ground, chatter around the market analysis community is that
corn prices will move significantly higher next year, even with
a record crop this year and stocks that are marginally
replenished. The thought is that escalating soybean prices won’t
allow as many acres to be planted to corn as this year’s
near-record number. That means corn prices will likely go higher
and competition for acres will get even more intense. Looking at
the Chicago Board of Trade in September, it was obvious both the
wheat and soybean markets were already trying to buy acres away
from corn.
“With higher crop
prices, farmland prices rise to reflect the increased value of
crop production. This accelerates gains in farmland prices,
which also reflect demand for land for nonagricultural uses,
such as housing and recreation,” says Paul Westcott, of the USDA
Economic Research Service (ERS).
In a September
report—U.S. Ethanol Expansion Driving Changes Throughout the Ag
Sector—Westcott explains, “Higher corn prices also will affect
farmers’ production decisions, as higher producer returns
provide economic incentives to increase corn acreage. Much of
this increase is likely to occur as farmers adjust crop
rotations between corn and soybeans. Other sources of land for
potential increased corn plantings include cropland used as
pasture, land in fallow, acreage returning to production from
expiring Conservation Reserve Program (CRP) contracts, and
shifts from other crops, such as cotton.
“Higher corn prices
reduce the profitability of meat production because of corn’s
importance to the livestock sector as an animal feed. In
response, red meat production is projected to decline in the
United States and growth in poultry output is likely to slow.
The impact of higher corn prices and feed costs is expected to
be partially offset by the greater availability of distillers’
grains (from ethanol production) as a substitute source for
feed.”
Current Reality
As it is, grassland pasture and range make up most of the
nation’s land use—31% (585 million acres) in 2002, compared to
636 million acres in the mid-1960’s say the folks at ERS.
Forest-use land comes in at about 30%, followed by cropland
(23%). What might surprise some is that urban land use only
accounts for 3%, although that’s where about 79% of the nation
population is resides.
In fact, ERS’ 2006
Agricultural Resources and Environmental Indicators says, “Even
large percentage increases in urban area would amount to small
decreases in rural area since it is so vast.”
The report goes on
to explain, “In response to expanding U.S. population, land in
urban uses—including homes, schools, office buildings, shopping
sites, and other commercial/industrial uses—increased from 15
million acres in 1945 to 25 million acres in 1960, 47 million
acres in 1980, and 59 million acres in 2002. While the U.S.
population nearly doubled, the amount of land urbanized
quadrupled. However, urban uses still comprise only 3 percent of
the total land area of the contiguous States.”
But, folks don’t
have to live there to impact land use through ownership.
Visit with cattle producers anywhere and you can hear a litany
of amazing-but-true tales about how fast land prices and rents
are increasing because of folks taking ownership who not only
aren’t from the agricultural side of the fence, but have no
interest in making their new possession available for
agricultural use. Some want to hunt, some just want to have a
place in the wild to call their own. Whatever the motivation,
agriculture has been competing with deep pockets from
non-producers for going on two decades now.
Blame the
economy.
Since 1980 per-capita disposable income has increased in this
nation by 65.3%; 31.6% since 1990; 9.9% since 2000 (Table 1).
That’s in terms of what the U.S. Bureau of Economic Analysis
refers to as chained dollars, in this case chained to 2000 and
put on a comparable scale that accounts for inflation.
Bust or Boom’s Beginning?
If you spend all or most of your time in agriculture, such
economic steam can be hard to fathom. But, lots of folks out
there seems to have plenty of cash money to throw at
discretionary interests, like owning land for any other reason
than generating annual revenue from it.
Charles Gilliland,
a research economist with the Texas Real Estate Center at Texas
A&M University reported that land values in Texas increased 18%
through the first half of last year ($1,681) compared to the
first half of 2005. He was expecting an annual increase of more
than 10% for the fourth consecutive year.
“Conventional
wisdom suggests that the current price of $1,681 per acre has
surpassed the price prudent investors should pay if they expect
to see a positive return on land ownership in 10 years,” wrote
Gilliland. He pointed out this conventional wisdom was
contingent on the next decade shaping up like the previous four
in that state. Over those 40 years, in dollars adjusted for
inflation, $1,200 per acre was the maximum amount paid by
investors who achieved a positive return on the investment.
However, he also
explained there are reasons to suggest there’s still room for
land prices in that state to grow beyond current historically
high levels due to increased population growth, inexpensive real
estate prices by national standards, and the fact that an
increasing number of people will be retiring and inheriting
additional wealth. Plus, he points out the mid 1980’s saw the
energy bust and a real estate crash fueled by excess leverage.
That’s Texas. But,
it’s hard to think of another state where some mix of population
growth, agricultural competition and impending wealth transfer
isn’t also in play.
Consider that
latter force alone. Estimates of the amount of wealth that will
be transferred from parents to Baby Boomers just now poised to
hit retirement age in full force vary widely. One estimate from
researchers at Boston College pegs the sum at $41 trillion
between 1998 and 2052. That’s an heretofore unimagined sum of
disposable wealth looking for a place to land.
Notwithstanding the current sub-prime lending fiasco, it appears
land values track the nation’s economic vitality and personal
real disposable income as much as anything else these days.
Combine that with the increasing competition for available
agricultural acres for its intended purpose and it’s hard to
imagine the bottom dropping out of the market anytime soon, if
ever. |
