The crash of residential and commercial real estate markets has barely ruffled agricultural property values, but that may change in coming months. There are factors on the horizon that could erode prices and quash sales.

Right now agricultural land prices are steady, but sales are so slow it's hard for appraisers to find fresh transactions to help peg current market values and determine where future prices might be headed.

Rural property appraisers cite a laundry list of threats to agricultural real estate values, starting with unreliable water supplies and moving through burdensome regulations, international competition, rising input costs and tighter credit availability. They warn there may be a continued softening of prices.

But the word on everyone's lips these days seems to be inflation, with concern about how inflationary forces might impact agricultural property values.

Rural property appraisers are deeply concerned about what an inflationary spike might do to agricultural property values, particularly when layered on the other challenges facing California agriculture.

"If you need to sell the family ranch right now you'll be facing a couple of issues: how reliable your water supply is and the outlook for the commodity your producing," said Mike Ming, a Bakersfield rural property appraiser. "Given the state of water deliveries from the government projects, I don't see how that can't have an effect on farm property values."

Ming, president of the California Chapter of the American Society of Farm Managers and Rural Appraisers, said it used to be that farms receiving project water were seen as having better water availability than those with well water, "now that's reversed, and we continue to see a transition from fodder crops to permanent plantings, which are more sensitive to water supply reliability issues."

Ming pointed out that Kern County land that has historically been planted to cotton is now going to permanent crops, with almonds and pistachios being popular planting choices. And converting from one commodity to another has been easier in the recent past since developer pressure on agricultural land has eased with the popping of the residential real estate bubble.

Southern San Joaquin Valley appraisers say the market for almond orchards stabilized last year, but sales activity slowed. The global economic recession has cut market demand for almonds the past couple of years and grower returns have declined.

Although this impact hasn't yet been reflected in property values, appraisers say they expect some softening in the market for almond properties. For citrus groves, appraisers say sales are taking longer to conclude and a softening in values has begun to show up.

The 2009 Trends in Agricultural Land & Lease Values Report noted slow sales and declining values for citrus properties is "becoming acute in the southeastern part of Tulare County, locations where irrigation water is more unreliable and costly to procure." Prices in Kern County have so far defied erosion.

In 2008, the tree fruit sector worked through its third poor economic year and appraisers talked to many farmers ready to throw in the towel, the trends report found. The report said, "Certain analysts suggest that overall fruit production needs to drop another 10 percent to 15 percent before conditions improve, which translates to nearly 20,000 acres being taken out of production."

At the end of 2008, there were a significant amount of fruit-orchard acres available, the appraisers said, and some fear inventories may grow, further softening citrus orchard values. One bright spot in Kings and Tulare counties is the increased value of walnut orchards. Per-acre prices were between $8,000 and $12,000 last year, up from $5,000 to $8,500 an acre five years ago.

One aspect of the agricultural real estate asset class that seems to be suffering the most is rural-residential homesite with 10 to 40 acres. Appraisers report sales have declined statewide, with a lot of properties on the market and very few buyers. This was true in high-priced winegrape growing regions, as well as the valleys and foothills.

An analysis of property sales on the San Joaquin Valley's west side indicates prices were stable during 2008. But, sales appear to have been to buyers who already own land in Westlands Water District and who wanted to secure rights to additional water to protect existing holdings.

The report said, "Most of the sales discovered did not receive market exposure, but rather, were negotiated directly between the buyers and sellers."

In the dairy producing counties, sales in 2008 were sluggish, but the difficulties of getting permits for new dairies because of environmental restrictions has had the effect of bolstering prices for newer, permitted dairy operations. In the northern San Joaquin Valley, prices in 2008 ranged from $1,800 to $3,600 per milking head, compared to a range of $1,800 to $2,900 in 2007.

"The dairy sector is having some difficulty," said Mark Clarke a senior vice president with Rabo AgriFinance. And, there isn't anything on the horizon that will support continued increases in those property values."

When asked about the specter of inflation, Clarke said, "The safest thing to say is that in previous periods of heavy government borrowing to fund new spending initiatives, a period of inflation has followed. However, offsetting that possibility is slack demand in the economy. We have a lot of production capacity in the national economy that's not being used. Usually inflation occurs when there's strong demand and limited supply.

In true inflation, he said prices rise and they stick. That being the case, an inflationary event fueled by government stimulation might cause a rapid run up in prices but might not be long lasting.

"History suggests we may be in for an inflationary event, but there are countervailing forces that could make the concern moot," he said. "If anything, most of the forces in place now would act towards stabilizing or preventing increases in prices for certain agricultural properties in certain markets."

With agricultural property values steady to softening, Fresno appraiser Tony Correia said there are some opportunities for farmers and ranchers in the current market who want to pass on agricultural assets to the next generation.

"One of the side effects of the current market for folks who are thinking about business transitions, a tenuous market, such as we're looking at today, can be used to advantage because more assets can be moved at lower values in a soft market.

"We're seeing more people taking advantage of these conditions to do some good estate planning," Correia said. "The experts say now is the time for gifting, sales and handing things off. There are a lot of techniques for asset transfers and now is a good time to figure them out."

Correia said appraisers aren't seeing the collapse in agricultural real estate assets that has been experienced in the residential property market.

"We don't see bankruptcies and foreclosures, but at the same time there's not much going on. The farm and ranch real estate market has pretty much been on hold since last fall. One of the biggest challenges for farm and ranch values will be the availability of water.

"It's not just the Central Valley, concerns about water are everywhere and the lack of adequate supplies has far reaching impact. Unfortunately, this is a problem that will be with us for a long time. It's not going to be solved overnight and asset values will reflect that."

Details from the presentations at the California Chapter of the American Society of Farm Managers and Rural Appraisers annual outlook meeting are available online at www.calasfmra.com. The 2009 Trends in Agricultural Land and Lease Values is $20 and can be ordered online from the chapter's Web site.