Ag economists see sharp rise in farmland values (complete article from source)
Source: The Clarke County Democrat, by Jamie Creamer
October 23, 2007
For the third year in a row, Alabama farmland has posted a double-digit increase in value, rising to a record high average of $3,100 per acre, U.S. Department of Agriculture estimates show.
That's up 10.6 percent from the 2006 peracre average of $2,750 and a whopping 84.5 percent jump since the dawning of the 21st century.
A combination of several factors has fueled the increase, Auburn University agricultural economics professor John Adrian said.
"Favorable interest rates, a popular tax incentive and outside demand for land by non-farm investors all have contributed to the high values for farm real estate in the state, particularly over the last three years," said Adrian, who, along with fellow AU ag economist Walt Prevatt, just completed an analysis of Alabama farmland returns and values from 1970 to the present.
Using the USDA figures, Adrian and Prevatt looked at the numbers for the 1970-1981 farm growth period, the 1982-1987 farm crisis period and from the end of that period to the present. They also evaluated variations in farm real estate values for the current decade.
The economists determined that values shot up an average of 14.2 percent annually during the boom years, posted an average 2.2- percent decline in the crisis years and rose, on average, 7.3 percent annually in the years since. Since 2000, real rates of return have averaged 9.7 percent, with the biggest gains coming in 2005 (up 29 percent), 2006 (up 14.6 percent) and 2007.
The two groups contributing most to the recent upsurge in farmland values are outside investors who want a piece of the rural landscape and individuals using the federal "1031 exchange" tax provision, Adrian said.
Outside investors include individuals or groups seeking land for recreational purposes such as hunting; developers looking to build shopping centers or subdivisions in transitional land markets; and investors looking for opportunities that could outperform the stock market or other potential investments.
As for the 1031 exchange, it allows people who sell property to defer paying capital gains taxes by investing the proceeds in a similar property elsewhere. That has affected prices, as farmers have sold high-value land near urban areas and subsequently bought farmland in more rural, lower-cost areas and states.
But while the value of farm acreage has soared, the cash rental rate for land leased to other farmers for crop production or pasture has remained relatively stable. According to the economists report, producers are paying an average of $30.30 per acre to rent farmland, just 1 percent of the land's market value and the lowest cash return on leased Alabama farmland since 1970.
"In 1970, when farm real estate value averaged $200 per acre, the rental rate was $13.20, or 6.6 percent of the land's cash value, but cash rent as a percentage of value has basically declined ever since," he said.
That could be because landlords are not fully aware of the dramatic increases in the value of their real estate, but Prevatt said it's more likely due to other factors.
"For one thing, the decline in the number of farmers in the state means there is more land available to rent than there is a demand for," he said. "But a bigger reason is that the majority of Alabama farmers are barely making a living now, and they simply cannot afford to pay high rent. Their income stream won't justify paying any more than they do to lease land."
The steady deflating of the real estate bubble in recent months in Alabama and nationally likely will affect farmland values to a
Prevatt said.
"Certainly right now, farm real estate values are far higher than can be justified from an agricultural standpoint, and we may see some weakening, but that should only be temporary," he said. "The non-farm demand for rural real estate should continue to have a positive influence on farmland prices into the future."
Regardless of current conditions in the real estate market, farmland in Alabama likely will remain a wise long-term investment, Prevatt said.
"The price of farmland is going to ebb and flow over time due to its many uses and users," Prevatt said. "Recessions and locally depressed economic conditions will cause prices to fall; growth in farm and non-farm demand will push farmland prices higher."
Prevatt said research back to 1850 has shown that, except for wartimes and the farm crisis period of the 1980s, Alabama farmland has been a high performer.
"I wouldn't advise anyone to buy land now just to turn around and sell it, but over the long run, it seems to be a smart investment," he said.
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