Why Aren't Farmland Values Crashing Like the 1980's?

Why Aren't Farmland Values Crashing Like the 1980's?
Photo Credit:AgView | Story Source: Farmers National Company

From: Farmers National Company

 

For those of us who farmed throughout the 1980’s Farm Crisis there is a question that lurks in the back of our minds. Why aren’t land values a lot lower? Commodity prices and farm incomes are entering the sixth down year since the recent peak in both, and farm working capital has fallen by two-thirds since it topped in 2012. Ag lenders are restructuring debt for more farmers each year and everyone has been expecting to see an increase in financially encouraged land sales to shore up those struggling the most. As happens during any ag cycle, there is a small percentage of producers and highly leveraged landowners who are facing tough choices.  

 



But there are several factors that are different today when compared to 30 to 35 years ago. Economically, the US is in a much different environment in 2019 than it was in 1980. Interest rates are still historically low and now it looks like the Federal Reserve will go even slower making the next raises. These low interest rates have a direct correlation to lower capitalization rates (return on investment) for farmland, which supports higher-than-expected land values. Inflation today is minimal compared to the double digit rates in the 1970s, which led to bad decisions being made with real asset purchases and debt financing.  

 



US agriculture had huge surpluses of corn and other grains in the 1980s. Today, we have a steady demand for nearly 40% of the corn crop for ethanol production that we didn’t have before. Also, China has been importing a big percentage of the US soybean crop until the trade issues were sprung on the market. In other words, we have more demand for the food and fiber produced by American agriculture that bodes well in the end.

 



There are several other factors that make today’s land market behave differently than 30+ years ago. The ownership of farmland is more diverse today than in 1980 due to farmers retiring over the years and passing the farm down through the next generations who keep the land but don’t farm. This growing diversity of ownership coupled with the fact that most farmland has no debt against it indicates that a smaller percentage of land is at risk of being forced on the market.

 



Over the past decade, there has been much more interest by individuals, pension plans, and investment capital in owning farmland as they look for a safe, but solid investment for the longer term. Investor buyers will be in the market during any land price decline as they make value purchases. This is different than in the 1980’s when there were no buyers in the market during the seven year fall in land prices. The supply of land for sale and the number of willing buyers is very important to the upcoming direction of land values. Time will tell if today’s land market is truly different than during the Farm Crisis.