My most recent Road Warrior stop was in Springfield, IL, to address the Agricultural Bankers Conference. Dr. Bruce Sherrick, University of Illinois, had some interesting perspectives on land values, specifically in Illinois.
The capital gains rate on farmland was 5.6% from 1950 to 2000. If the period is reduced to 1970 to 2000, the return was 5.1%. For the period 1980 to 2000, including the farm crisis years when land deflation occurred, the return was 2%. The return from 1970 to 2008 was 5.8%, with a spike of 10% so far in 2008. The bottom line is that over the past 58 years, there has been a long progression of capital gains with one period of significant losses: the 1980s.
Farmland now represents 87% of U.S. farm assets and an estimated 53% of farm debt. Much of the equity growth in U.S. farm balance sheets has been driven by real estate appreciation. Does that sound familiar to what occurred in the stock market and with urban and suburban real estate a few years ago?
Farmland values have been in almost a 60-year growth mode influenced by government support to agriculture, increased investment by investors and the non-farm public and diversified income streams (food, fiber, fuel and products for the life sciences and life experiences).
Will it continue? These factors could result in land values staying bullish.
- A flight of capital periodically to hard assets during geopolitical and economic uncertainty
- Less volatility in interest rates
- Higher standards of living and a growing global population which exceeds production output due to technology
- Technological advances in the hands of excellent managers in productive natural resource areas
Where this stops, no one knows!
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.