June 01, 2021
Historical & Future US Farmland Prices By State
FarmTogether makes it possible to invest in farmland without having to buy the whole farm outright. This not only makes farmland investing more accessible to more people, but also allows for newfound capital infusion into sustainable agriculture. As FarmTogether expands their investment portfolio to more and more regions of the country, one of the most important benchmarks is the average price per acre of farmland in each state.
Farmland value reflects its productivity potential and its potential alternative uses. These categories are functions of things like proximity to an urban center, recreation potential, soil type, annual precipitation, irrigation capacity, and historical management. FarmTogether’s sourcing process entails identifying areas where these features correlate with land values showing low volatility and high potential for returns. The following article will explore the factors that contribute to differing farmland valuations across the U.S.
According to traditional economic theory surrounding agricultural land, the sale price per acre should reflect the Net Present Value of all future annual income (or cash rents as they are often referred to) that the property can produce. So, if the land has the potential to produce $800/acre of crop income per year indefinitely, and we have a discount rate of 4%, then the value of the land/acre is $20,000. As discussed in this article, each state produces different crops due to differing markets and production capacity (such as growing season, soil types, etc.), creating differing cash rents, and therefore differing land values.
Farmland value calculations tend not to reflect just their production capacity (or rents) but also the alternative use potential. Most often, this is the development potential of the land for housing, but also could be the energy potential (like wind and solar) or recreation potential (such as big-game hunting). Because the value of farmland is derived from various markets, it’s an increasingly popular investment strategy and is shown to hold value during turbulent times, showing stable growth in value even through the 2020 Covid-19 pandemic.
Historical Farmland Values
Now that we know a little more about how farmland value is derived, let’s look back to see how it has changed across time, and what causes some of the changes. Over the past 14 years, we have seen stable growth in value, even through the Great Recession and in the 2020 recession.
So, at a macroeconomic scale, what causes cropland value to increase over time? Land values have various complex and intertwined supply and demand shifters that affect the price of land.
- For one, they are tied to the agricultural commodity price market, as higher commodity prices mean higher cash rents and therefore more value.
- Secondly, values are related to population growth, which increases the demand for ag products. Thirdly, they are tied to technological developments, which can increase value for early adopters (if the price of the technology is low enough), but in the long-run create more “effective supply” of land, decreasing land prices.
- Lastly, increases in demand for alternative uses of land, as previously discussed, can increase demand for agricultural land and increase prices.
We are constantly seeing these price shifters work. Population is increasing globally, but remaining steady in more developed economies. Alternative use demands are increasing, particularly around urban centers. Farmland markets are likely to experience a large increase in supply due to the aging population of farmers across the United States. Technology is pushing the abilities of an acre of farmland to be more productive than ever. Additionally, the supply of quality farmland is diminishing, with over 11 million acres being converted out of agriculture from 2001 to 2016.
Investing in land can be difficult as the aforementioned price shifters are dynamic, changing and working with and against the others in a constant evolution of ups and downs. FarmTogether is constantly monitoring trends and understanding the price dynamics of land, so investors don’t have to. You can read more on these various shifters here.
Value By State
Ok, so now that we know the details regarding what causes farmland value to differ by state, let’s take a look at a map of 2020 cropland values.
Map comes from this report by the USDA
The old adage around investing in land is “location, location, location”. This map shows us the hotspots for farmland value across the U.S, and the hotspots of farmland value around the U.S. We also see that the Southeast and Texas are seeing substantial gains in 2020 over 2019 farmland values. Idaho is another state with rapidly rising agricultural land prices. California and the Midwest remain at the top of the price/acre categories, due in large part to these state’s incredible production potential.
Production potential on cropland, however, is not just a function of location. It is also a product of historical management, commodity prices, and infrastructure. In states where the average cropland values are relatively low, high returns are possible through strategic capital investment and high value crop choices. As prices increase from development pressure and other alternative farmland uses, fertile and well-managed agricultural land will retain a premium price as demand for food isn’t going anywhere.
Future Land Values
The thing people really want to know when it comes to prices, inevitably, is what will happen in the future? While this is impossible to predict with certainty, there are a few key changes to be on the lookout for.
First, remember how the present day value hypothetically captures the discounted future cash rents? Well the future values of agricultural land may be changing. Demand for food and decreasing quality agricultural land supply continues to drive market shifts in agland values. Additionally, agland with water rights in arid climates may see future land value changes if alternative transfer methods and other water leasing structures allow for sustained cash rents for the use of water without the sale of the land. These changes, and more likely on the way, will continue to drive farmland value shifts.
Farmland is not only a stable investment, but the team at FarmTogether is constantly monitoring all of these price shifters to ensure that they are giving investors stable returns, all the while supporting sustainable agriculture across the U.S.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.
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