Why Aren't Farmland Values Crashing Like the 1980's?
February 4, 2019
For those of us who farmed throughout the
1980s Farm Crisis there is a question that lurks in the back of our minds. Why
aren't land values a lot lower? Commodity prices and farm incomes are entering the sixth down year since
the recent peak in both, and farm working capital has fallen by two-thirds
since it topped in 2012. Ag lenders are restructuring debt for more farmers each
year and everyone has been expecting to see an increase in financially
encouraged land sales to shore up those struggling the most. As happens during
any ag cycle, there is a small percentage of
producers and highly leveraged landowners who are facing tough choices.
But there are several factors that are different today when compared to 30 to
35 years ago. Economically, the US is in a much different environment in 2019
than it was in 1980. Interest rates are still historically low and now it looks
like the Federal Reserve will go even slower making the next raises. These
low interest rates have a direct correlation to lower capitalization rates
(return on investment) for farmland, which supports
higher-than-expected land values. Inflation today is minimal compared to the
double digit rates in the 1970s, which led to bad decisions being made with
real asset purchases and debt financing.
US agriculture had huge surpluses of corn and other grains in the 1980s. Today,
we have a steady demand for nearly 40% of the corn crop for ethanol production
that we didn't have before. Also, China has been importing a big percentage of
the US soybean crop until the trade issues were sprung on the market. In other
words, we have more demand for the food and fiber produced by American
agriculture that bodes well in the end.
There are several other factors that make today's land market behave
differently than 30+ years ago. The ownership of farmland is more diverse today
than in 1980 due to farmers retiring over the years and passing the farm down
through the next generations who keep the land but don't farm. This growing
diversity of ownership coupled with the fact that most farmland has no debt
against it indicates that a smaller percentage of land is at risk of
being forced on the market.
Over the past decade, there has been much more interest by individuals, pension
plans, and investment capital in owning farmland as they look for a safe, but
solid investment for the longer term. Investor buyers will be in the market
during any land price decline as they make value purchases. This is different
than in the 1980's when there were no buyers in the market during the seven
year fall in land prices. The supply of land for sale and the number of willing
buyers is very important to the upcoming direction of land values. Time will
tell if today's land market is truly different than during the Farm Crisis.
President - Real Estate Operations
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