Here's a good article from Fortune/CNN-Money about the resilience of the agricultural real estate market. One never thinks much about agricultural real estate, but the value of the land reflects the amount a farmer can borrow to run his business and ability to put in his crops. Agricultural land has suffered far less in the recent downturn than residential and commercial real estate markets. Since 1945 the average size of a farm has increased from 213 to 461 acres, but yields have increased three to four fold. Still, the increased yields are working against the income of the farmer with each 1% increase in yield resulting in a 4.5% decrease in prices at the farm gate.

Despite this increase in size and productivity, the market in acreage is cognizant of the fact that we're losing an area of agricultural production the size of Ohio and Pennsylvania every 30 years, and our population is trending up. The bottom line is that the number of farms in the US is at an all time low, and that number is trending downward. The size of the farms are getting bigger, yields are going up, yet the arable amount of agriculture land is approaching a historical low basis the total population. We're down to 0.6 acres of arable farm land per person and that number is shrinking drastically.

The market is aware of these trends and the invisible hand is keeping the prices in agricultural land more in line with reality than the other real estate markets. Most farm land is sold without a broker and reporting of exact prices is difficult, as only the county assessors are privy to this most sensitive of information. Still, the broad trend of prices is up, and many are placing huge bets on the rise. Farmers are mostly close-mouthed, and asking a farmer how many acres he owns or how many head of cattle he has is tantamount to asking him how much money he has in the bank. Simply not good manners.

Jeff Watson, surfer, speculator and art connoisseur, blogs as MasterOfTheUniverse.

Scott Brooks respectfully disagrees:

I have to respectfully disagree with much of what Jeff has written here, though. He is right that the the farming landscape (both figuratively and literally) has changed immensely and keeps changing over time.

But as to farmers not wanting people to know how much land or how much cattle or how much crops they're running, that may be true, but it's certainly not like how much money they have in the bank. You're money in the bank can be kept a secret, but the amount of land you have is pretty much wide open for the world to see. I can go to the FSA office and use their computer system to draw boundaries around a person's property and it will tell me how many acres they have….plus, anyone who lives in the area for any period of time knows how much land farmer Jones has. As to how many heads of cattle one runs, that's open for the world to see, too. And on top of that, if you ask a rancher how many head of cattle they are running, it's been my experience that they will usually tell you.

Most farmers that I know do not have to borrow against their land to run their operations. The FSA office, the local grain elevator, or the local farmers bank will almost always loan money to farmers to grow their crops. I know some pretty awful farmers and they still get the inputs fronted to them by these entities.

Farm land pricing is very regional in nature and depends on the type of land. Bottom land in the farming country is very valuable in terms of income. Hay ground, pasture and non-bottom crop ground is probably next in pecking order. Land in my area of MO, is priced low compared to land two counties over and much lower than land two counties north in Iowa. Scrub land, the land that was of little or no value a few years ago, is now very valuable as hunters (like myself) come in and want to buy up property for recreation.

The little farmer with 461 acres is not what you think he is. Take me and my 522 acres. Based on the standards of the study cited, I am above average in terms of farm size…..but…..I do NOT farm my land (I don't even live on my farm). So what this changes is perspective. I may not farm my land, but it does get farmed. What happens is a farmer (who owns around 750 acres within their family) rents my land for farming purposes (bottom land for crops, grasslands for hay, and other lands for spreading excess manure from his pig operation).

You see, a farmer usually can not make much of a living off 461 acres. So real farmers (non-corporate farmers) rent up a bunch of land to farm. My farmer rents my land and a bunch of other land so that he has agricultural control over ~ 3000 - 3500 acres of land (3,200 acres is the equivalent of 5 square miles of land……640 acres is equal to 1 square mile). The family can run crops, do contour farming, hill top farming, cut hay, run cattle, build hog barns, and many other activities in order to make money.

As to the pricing of crops, I don't believe that we'll actually know the value of the crop (grain or cattle) as long as the government keeps subsidizing their values.

The discussion of subsidies is a whole other post that I don't have time to go into, but suffice it to say, a book could be written on the subject (and several probably have). I'll just say this final thought about them. It is my opinion that the government is like a drug pusher, that once they get their hooks in you with the drug of subsidies, you can't get off them.

As to farm land prices being in line with reality goes……….. This is just false. My farm has quadrupled in value since I bought it 10 years ago, and I've had offers to purchase it for 7 times what I paid for as recently as 3 years ago.

Farm prices skyrocketed in the boom, but they also have not suffered as much as other real estate in the downturn. Most farms in my area, quadrupled in value over the last ten years. They actually quadrupled in 7 years and have remained fairly steady over the last 3. My farm was an exception to the rule due to the fact that I ran a Quality Deer Management Program on my farm and had 7 years of records and pictures of our progress. Due to the work I did, wealthy hunters from out of state were inquiring about purchasing my land for hunting purposes. Those offers have mostly dried up due to the economic downturn.

Obviously there is more to write on farming, but I have a 4 hour and 15 minute drive home from my farm (been up here hunting for the last two weeks) back to my home in St. Louis, so I'm gonna cut it off here.

But I will say this before I sign off. Everything that I have said is very much regionally based. Remember, farming is VERY regional. So what I've written here may not be germane to what is happening in northern Iowa.

So with that being said, what Jeff Watson has written may be true overall, but it's not in my area……so take what I've written with the appropriate grain of salt.

Bruno Ombreux adds:

Here in France a state agency called SAFER records land sales. Their database holds more than 6 million transactions starting in 1970. They have less exhaustive data from 1950.

Unfortunately their database is on a pay-per-use access. But browsing it one can conclude:

- as Scott said, prices are very location dependent. There are literally thousands of micro-markets. Poor grassland in remote locations can be acquired for less than 1000 euros/hectare. Some wine land in Burgundy can fetch several million euros/hectare. (1 hectare = 2.47 acres).

- when one looks at the average of all transactions, land is a very good inflation hedge.

In real terms, prices today are a bit higher than in 1950. Land preserved its value through the inflationary 60s and 70s!

Actually, it looks like land is a leveraged inflation bet, with asymmetric payoffs around a CPI threshold. Above the threshold, one gain more than inflation, below the threshold, one loses in real terms.

On this long-term chart, there are 3 periods:

- 1950-1979: land prices gained in real terms. They increased faster than inflation. - 1980-1995: land prices decreased in real terms, while there was low but still positive inflation. - 1996-present: prices are gaining again in real term, by more than official CPI.

Stefan Jovanovich adds:

 The settlers in Plymouth had experience in growing the cereals that were the major foodstuffs for Europeans in the 17th century: Barley, Oats, Rye, and Wheat. It strikes me as highly improbable that the one edible grass born in the Americas - corn (maize) - would have been so surprising to the Plymouth colonists that, but for the help of the Wampanoags, they would not have known what to do with it. The colonists called it "Indian corn" because it was so different from the types of corns (or grains) they were used to growing and eating; but the name itself suggests that they hardly needed instruction in planting (their colony was named The Plimouth Plantation).

Here is Bradford's version of how "Indian corn" was discovered:

"They also found two of the Indian's houses covered with mats, and some of their implements in them; but the people had run away and could not be seen. They also found more corn, and beans of various colours. These they brought away, intending to give them full satisfaction (repayment) when they should meet with any of them, - as about six months afterwards they did… And it is to be noted as a special providence of God, and a great mercy to this poor people, that they thus got seed to plant corn the next year, or they might have starved; for they had none, nor any likelihood of getting any, till too late for the planting season."





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1 Comment so far

  1. Nick Pribus on November 25, 2009 4:02 pm

    I had an old friend try to convince me to buy in on an investment in a $12 million mansion in the Outer Banks "you know they ain't making anymore of this beachfront property." I told him Mother Nature is regularly resettling the beaches with tough storms adding and removing 100's of meters of coastline on a regular basis. That’s no investment, that’s a hobby for rich people. I told him for that money he could by a few thousand acres of good Iowa farmland, they certainly aren’t making any more of that either, and when push comes to shove I still eat but I haven’t made my annual journey to the Outer Banks since this recession started.
    Or for $12 million you can buy a few hundred thousand acres in a place like Kazakhstan where I just travelled a couple weeks looking for a good farm to buy. The land is not as good as that lush Iowa dirt, and you may only net $10 an acre instead of the net a dozen times or more than that in Iowa. On the other hand, that Iowa productivity bounces up against the law of diminishing returns, it will take a lot longer to up the yields on Iowa acreage whereas, tripling the yields on unprofessionally or unscientifically farmed Kazakh steppe can be done by just picking the low hanging fruit, so to speak, and pardon the pun. Isn’t that what investment is all about, profit per unit divided by investment per unit times utilization.
    Moreover, in the last decade, farmland no longer produces solely food energy. The landscape of agriculture has changed forever only recently as farmland is now an industrial commodity capable of producing energy in the form of ethanol and biodiesel, a new flexibility and opportunity for diversification and profit. A farmer may now convert his corn into fuel for his tractor, or into tasty cornbread, but no matter how hard he tries, a wildcatter can’t make oil into a sandwich.
    Being the 9th largest country in the world with a population of just 15 million, Kazakhstan ranks consistently number 2 in arable land per capita, and much of that land is not even cultivated in these tough economic times, and what is under plow is cultivated primitively. (Australia, the Saudi Arabia of farm land bank significantly leads the pack-I hate leaving those obvious next questions unanswered). Kazakhstan’s next door neighbor China has 20 individual cities with more people than the whole of Kazakhstan, but 1/20th the arable land per capita. Sure China has that unparalleled secular growth story, but it’s fiercely competitive unprofitable growth. And sure China has those enormous currency reserves, but on a per capita basis not as much as cash as Kazakhstan, nor as much oil, gold, zinc, copper, uranium, gas, nickel, titanium, niobium…no need to list the whole of Mendleev’s table, but it all applies. And farmland.
    Not bad for such a huge country nobody ever heard of, and most can scarcely find it on a map but while the hot money chases deals in China I keep wandering the endless steppe just a bit further west.


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