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Farmland demand not slowing down

Agriculture.com Staff 01/11/2011 @ 2:42pm

Much of the U.S. economy has been slow to recover from the recession. That hasn't been true of farmland markets, which have continued to climb, a group of Purdue University agricultural economists says.

Strong crop returns, very low interest rates and a growing expectation that both might continue have had a positive influence on farmland values, say Mike Boehlje, Chris Hurt and Brent Gloy in a university report.

"Even while some residential and commercial real estate values have been falling, that has not been the case for farm real estate," Boehlje says. "Instead, we've seen some high prices for farmland in recent months, even exceeding $10,000 an acre in some extreme cases."

Farmland values have risen steadily since 1987 but have shot up in recent years. Between 2000 and 2010 the average price per acre of average-quality Indiana farmland -- land capable of producing an average corn yield of 155 bushels -- rose from about $2,300 to just over $4,400 this past June, the economists say. Land values continued to increase even more dramatically during the last half of 2010.

"These higher prices aren't for development purposes," Boehlje says. "Many of the land sales in the Midwest are to farmers rather than outside investors, so it's farmers bidding against farmers. Not only is land demand strong but also supply is low as few families are willing to sell. Strong demand with limited supply makes farmland a hot commodity, both for its asset value and the income it can generate.

"In addition, low interest rates are making farmland attractive, and farmland is seen as a hedge against inflation. Farmland and real assets, whether they be land or commodities, are perceived by many to have more inflation hedge potential than financial assets."

Higher crop prices play a major role in farmland values as they increase returns, Hurt says. Global demand for grain is growing, brought on by higher world incomes and the increased use of crops for biofuels.

Two huge growth markets have been corn for ethanol and soybean exports to China, Hurt says. In 2005 those two markets required 16 million acres of production. By 2010 it took 41 million acres of the two crops to meet those market demands, he says.

"That's a startling 25 million-acre increase in the demand for land," Hurt says. "It represents about 10 percent of the U.S. crop base planted to major crops. That says we've had a very large increase in demand for land and is thus one of the primary contributors to surging land values on the demand side."

Crop prices also are getting an indirect boost from Federal Reserve monetary policy. Hurt said the second round of the Fed's buying of Treasury securities through so-called "quantitative easing" is conducive to weakening the U.S. dollar and creating inflation.

"The act of creating more money tends to depress the value of the dollar. That generally results in stronger commodity prices, which would then push up returns to farmland and be an added stimulant to land values," he says.

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