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Farmland Prices Are Higher
By Joel Hertz, AFM, ARA, AAC, ALC
Land values have increased 4 to 10% across most of the Midwest over the past 12 months. The exception is in western Nebraska where land prices are lower due to three years of drought. High quality land and land with recreational potential are in very strong demand. Demand for expansion by farm operators has continued to grow and intensify. Investors are being recruited by farmers to buy land they can farm.
People like land because it is a solid asset, provides an annual cash return, and has the potential to appreciate. The owner can control land, enjoy its recreational aspects, its aesthetic value and personal space. The lack of available comparable alternative investments that have security, earnings and opportunity for appreciation make farmland an attractive investment. The importance of preserving capital is being recognized and valued in the U.S. similar to Europe where returns are lower and land prices are higher.
The capitalized rate (cash return divided by market value) on Midwest farmland has gone down from the historic 5% rate of return to 3-4%. If the net return on land is $140 per acre, the market value increases from $2,800 per acre to $3,500 per acre by reducing the capitalization rate from 5% to 4%. A 3-4% cash return on land with the potential of appreciation is preferred to the uncertainty of the stock market or having money in CD's with the current low interest rates.
Land values in central Illinois have taken a big jump recently to $3,200 to $3,600 per acre and higher. This is the same area that saw a drop in farmland values from 1999 ($3,200 to $3,400/A.) to September 2002 ($2,800 to $3,200/A.)
Land owners selling in developing areas around larger cities and around growing metropolitan areas are receiving bids that make it possible to trade one acre for two to ten acres. The price a developer can pay is determined by his cost of developing the land, the number of houses that can be constructed, construction costs, and how fast the lots or houses will sell. The price of land is a residual number.
Government Farm Programs are providing an underlying support to the land market. The commodity program, conservation programs such as CREP, Wetlands Reserve and Conservation Reserve Programs are very supportive. The conservation programs have made poorer quality land more valuable and less risky.
Land is a safe investment. It is a hedge against inflation and recent security fears have added to its value. The desire for space and recreation and the emotional and sentimental value of owning a piece of this United States is helping to fuel higher land prices. People are interested in getting out of the city and building houses in the country. They desire more space and security.
Value to a buyer or landowner is not always the same as price per acre. The price one is willing to pay depends on how a person values land, its return, location, aesthetics, government program support, diversification, emotional appeal, and what it does for the owner or potential purchaser. A person's available capital, alternative investments, expected potential earnings, personal income, fears, recreational attributes, risk taking ability, world outlook, and personal cares and desires all factor into the mix that make up value and ultimately the price.
The general public is looking for security, earnings, space, recreation, and available management. Many people would just like to own a piece of this USA and appreciate the opportunity. For many buyers, price is not the most important factor in determining value of ownership.
