What can cause land to increase in price?

Recently, a post on Agriculture Online's Land discussion group with the title above asked the question about where land prices are headed. I am not an economist, and I certainly do not have the answer to exactly which direction land prices might head in the future. Sir Isaac Newton once said, "If I have seen further it is by standing on the shoulders of giants. With that statement in mind, this contribution will provide some thoughts to ponder." Some of these thoughts might help some to come to their own conclusions concerning the direction of land prices. The attempts below to provide fodder for thought comes from years of experience, and are based on listening to some other very wise farmers from the past.

Could inflation affect land prices?

When inflation is on the rise, individuals look for somewhere to park money that is "safe". They often look for land, as it is tangible and has many uses. Economists tell us there is no inflation, but many of us in the country wonder why everything we purchase has continued to rise in price over the past few years. Where is this lack of inflation and stable prices the experts talk about?

Here in the Midwest, most of us concur that inflation is happening, and has happened for many years. Low interest rates have helped many continue farming with borrowed money, and they have allowed some with a better financial base to even profit a bit. Other than interest rates, only the price of farm commodities has decreased and stayed low for those of us on the farm.

Wage earners report their salary going down and basic expenses increasing as unemployment runs rampant in the years since NAFTA. Local jobs have gone south or overseas, and plants have closed. Many excellent workers, with jobs they never thought would be gone, find themselves with higher housing costs, higher food prices, increasing gasoline price, and very little money to spend for these basics necessary for what we consider a fulfilling life.

Will housing and 1031 money affect prices?

The housing boom could slow down with inflation and higher interest.

A professional who sold his house with the intention of building new recently decided to reconsider that intention. After pricing inflated building materials, he decided to buy a smaller house, and wait for materials to go down before building the house he had planned.

How many others might be considering the same? If you knew the answer to that question, you might predict when the short-term high is for land. If the present housing bubble continues, land will continue to increase in price as 1031 money from populated areas moves to more rural areas to buy land. Personally, I think we should see a slowdown in housing start in the near future. Long-term, the population of the world is increasing. With more people and more houses, higher land prices may continue their upward spiral.

Will a changing direction of commodity prices affect land price?

Commodity prices have improved, and with the lower dollar, exports have increased. Higher prices should support land prices for a while, or at least cause some slight increase in price. We then wonder how long the higher prices might last. We also should remember that the past has seen much higher prices than currently posted, with much lower expenses. Land prices were then lower than the current selling price of most pieces of land in the country.

How might the stock market affect agriculture lands?

If we can get past some of the current Middle East problems, we could well see a more stable dollar, causing a possible increase in foreign investment in our stock market. Will those stock market prices support or increase land prices, as people continue to look for places to put their profits from an increasing market? Current stockowners are stable investors. The short-term go-go investors seem to have left the market, as they lost so much money in the scandals of the recent past. The stable investors may well move a percentage of their increased capital into land, as they have in the past. It is no secret that the sophisticated investor desires a balanced portfolio of cash, bonds, stock, and hard assets. Will investors continue this trend if they increase their stock market profits?

Demand for more commodities could affect land prices.

It wasn't that long ago that I heard the "experts" say we could not possibly use a 7 billion-bushel corn crop. Now we have demand in the market for corn and soybeans, with wheat making some strides. Our local ethanol plant goes on line as I write this piece. Some say the local counties of Crawford and Jasper cannot possibly produce enough corn to fulfill the needs of the local plant if they can get to full capacity profitably. How many other such uses for grain are increasing demand that can support or increase land prices?

They "ain't" making any more of it

The fact that people are not creating more land has been used for years in defense of those who believe there is only an upward direction for land prices. Many have explained how South America continues to bring more land into production each year; developers clear rain forests to provide room for more grain production. The question becomes one of where you want to live, farm, and raise your family. Some in this country are already buying land in South America, and some are even moving to farm in that area.

But, they sure "ain't" making any more of it in the United States. If that is where you want to farm, you will not see more land created next to your land. When land next to what you already farm comes up for sale, what value will you apply to be able to easily farm a few more acres? What value will you apply to be able to provide an increased land base for those in your family that might farm after you make the generational change that is sure to come in the future?

Land is a long-term investment, and history of land prices shows us bubbles form, are broken, and reform again. The process takes many years, sometimes many generations. The key to making land purchases as a farmer who will farm that land is whether or not you can pay the taxes and interest. The principal payment on land can often be forgiven in bad crop years, and one could always pay ahead on principal if crops are better. Be sure you structure any land loans to include these provisions, as it is also an excellent way to decrease interest cost on land purchases. Land prices are usually subsidized by some other form of income, either on-farm paid-for acres, or off-farm investments. Agricultural land is a good forced saving plan for many farmers.

Your age can make a big difference in your desire to pay above the current cash-flow price of the land. Remember, there are no investments that do not lose money, as many 401-K investors who relied on the tech stock bubble recently discovered. At least if you are a farmer, the land is still there to slowly provide income if the crops are not destroyed by weather or natural forces.

What type of land will increase in price?

Farm economists from years ago said the high-quality land in the future would go up in price much faster than the lower quality pieces. That appears to be true, unless the lower quality agriculture lands are converted to industrial or housing uses. In other words, not all land will increase in price at the same percentage. Not all areas will increase in price at the same percentage, as well.

One truth offered concerning land prices in the future.

I have found only one truth in the time I have farmed, and it is that as sure as you and all the other experts are positive the price of anything cannot go lower (or higher), only higher (or lower), the opposite usually occurs.

To understand the last sentence, study more about contrary opinion, and how market traders use it.

-©John Dappert 2004