By Ben Isaacson and Maurie Cashman / Guest Column
The demand for food due to population growth and rising standards of living in developing countries is well documented.
One measure for this demand is farmland and other agricultural asset values. The grain farmer is in the sixth year of declining commodity prices, but the demand for land ownership has remained strong. The table above compares the decline in commodity prices and land values during the 1980’s (the last major decline in corn and soybean prices) versus more recent times in East Central Iowa.
Corn prices declined 55 percent from 1983 to 1986, which correlated with a 60 percent drop in land values during the 1980s. Similarly, corn prices declined 53 percent from 2012 to 2017, but land values only declined 15 percent.
Why haven’t we had a larger deterioration in land values? A few reasons:
- There is less total agricultural debt today than there was in the 1980s. There are operations that have a lot of debt, but the range from the strongest to the weakest balance sheets is wider and continues to grow. Combine this with much lower interest rates, and many farmers have adequate equity for a down payment on a farm and access to credit to finance the remainder of the purchase.
- Tax law allows landowners to sell land and reinvest in other land via a 1031 exchange, supporting many local markets. A 1031 exchange allows a landowner to sell their land and purchase a like-kind property within six months, deferring the capital gains tax until the replacement property is sold sometime in the future. Areas that have experienced rapid urban development have seen many landowners sell their land for development purposes and re-invest in farmland. The tight time constraint to reinvest has driven local land markets.
- New sources of grain farming revenue have been added that make this different from 30 years ago. Farm programs have provided sources of capital including crop insurance, farm program payments and market facilitation program payments due to recent tariffs. The integration of livestock production has injected new sources of capital into the rural economy. These have had a stabilizing effect on farm incomes, increased predictability and made investments in farmland less volatile.
- Record-breaking yields for corn and soybeans have helped keep gross revenue per acre relatively stable the last few years. Weather, seed genetics and equipment capacity are among a few items driving these productivity increases, which have created a floor under land values.
- Lastly, farmers, landowners and investors believe land is a great long-term investment. Even though land values have periods of decline, they are few and far between and values have appreciated over the long-run. Land can provide a consistent, safe, reliable form of income. The occupancy rate for farmland is 100 percent.
Land is seen as a substitute for a long-term government bond, a hedge against inflation and an asset providing upside to its value. In the end, landowners understand the long-term needs of a growing population demanding higher standards of living and see land as a great part of their portfolio. •
Ben Isaacson is a member-owner of Agri-Management Farm Services LLC and works in all areas of the business. Maurie Cashman is a member-owner of Agri-Management Farm Services LLC and manages its Aspen Grove Investments brand.