April 29, 2019
As with other income-generating real property assets, such as
commercial buildings, net income is important in valuing farm and ranch land. Income
that the asset generates over the years is the underlying basis in determining
the asset's value. Of course, there are other important factors that affect
the value of land such as interest rates,
supply of land for sale, demand to buy, and the return on competing
investments. All of these factors have an influence on the price of land at any
given moment in time, but the basis of value is the income generated.
To think about the future, you have to study the past. One chart that we can
look at is the 90 year history of real net farm income from 1929 to 2018
adjusted to 2017 dollars. Average US net farm income during this time frame was
near $80 billion. There were three main periods of above average net farm
income accounting for 28% of the time. Near average incomes were experienced
26% of the time. Below average net farm income happened 46% of the time or
nearly half of the 90 year period. Net farm income for the two most recent
years falls around $64 to $69 billion, which is much below average.
An interesting aspect of the 90 year period is that after the first two main
periods of above average incomes (1940s and the early 1970s), there was a
period of years with average to below net farm incomes lasting 20 to 25 years.
Since the most recent income peak in 2013, we have experienced five down years
ending up in the much below territory. While net farm income was dropping
nearly 50% during the past five years, land values dropped less than half that
amount. As was said, other factors such as low interest rates and a good
equilibrium of buyers and sellers supported land values.
Going forward, net farm income is forecast to rebound somewhat, but it is
dependent on demand for grain, world crop sizes, and world economic conditions.
Will we be in an extended period of average or below incomes, or will things be
different today because of world population growth, scarce resources in parts
of the world, and the growing list of uncertainties surrounding agriculture?
President - Real Estate Operations
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