farmgate: How Is Your Back 40 Doing; And What Is Happening To Its Shirtail Relatives?
What does farmland ownership mean to you? Does it bequeath power over other farmers who do not have the capital to buy land? Does it provide a freedom that may not exist without that deed? Does it mean that capital has been unnecessarily tied up while others are unsaddled by taxes or debt? Those are some heavy questions to begin our discussion today about U.S. farmland: where is it, how much is it worth, and the details behind the farmland economic engine.
One of the most interest statistics in an exhaustive farmland study produced by Lyn Forster of Ohio State University is that, “Total cropland was 442 million acres in 2002 and has changed surprising little since 1949 when it totaled 478 million acres.” Forster’s research, An Overview of U.S. Farm Real Estate Markets is an examination of the farm real estate market, and comes as the farmland trading season begins in the next two months.
Forster says there are nearly 2.3 billion acres of land in the US, “Major uses in 2002 were
forest-use land, 651 million acres (28.8%); grassland, pasture and range land, 587 million acres (25.9%); cropland, 442 million acres (19.5%); special uses (primarily parks and wildlife areas), 297 million acres (13.1%); miscellaneous other uses, 228 million acres (10.1%); and urban land, 60 million acres (2.6%).” In all likelihood, the last category has grown a bit since 1949, possibly at the expense of cropland, which has shrunk by 36 million acres. Of course part of the shrinkage of cropland is due to the 35 million acres in the Conservation Reserve Program, which has shifted from cropland to grassland, pasture, and rangeland. But some prior rangeland has been converted to cropland with the help of irrigation, which demonstrates that land use is somewhat dynamic.
60% of US land is privately owned, with federal, state, and local governments owning 37%. Of the 1.4 billion acres of private land holdings, its use is equally spread across cropland (32%), grass and rangeland (26%), and forest (31%). Privately owned land is primarily in the eastern two-thirds of the nation, and private owners hold 99% of the nation’s cropland.
Farm real estate ownership and land values are closely connected, and Forster says, “Farm real estate consists of tangible assets such as land, fencing, drainage/irrigation improvements, and buildings. For areas unaffected by land use conversion to residential or commercial uses, farm real estate values are a function of expected future net returns from crop and livestock products. Real estate in areas of intense concentrations of crop sales and livestock sales would be expected to have higher agricultural use values.”
Looking at ownership, Forster says 3.4 million farmland owners are primarily individuals and families (70%), partnerships (14%), and family-held corporations (10%). Those who operate farms own 60% of the land and rent the other 40% from non-operating owners. When size of farm is examined, 33% of owners have 3% of the land and 10% of the owners hold 62% of the land. And about 5% of the land changes hands annually.
Farm operators lease about 38% of total farmland, down about 5% over the prior 10 years, but farm leasing has made a complete reversal over time in the way it is looked upon. Many years ago, Forster says rented land was the only way that poorer individuals could have any chance at making money from the soil, and they were on the bottom rung of the ladder. Today, leased land is the way that the largest operators are able to achieve their extensive economies of scale, and rented land may be preferable than having to tie up assets and pay taxes.
Land values declined in the 1920’s, 1930’s, and mid-1980’s, but during the balance of the past century, farm real estate investments appreciated in value. Forster says, “From their low point in 1987, U.S. farm real estate values have risen substantially: 4.4% average annual increase during 1987-1997, and 8.3% average annual increase during 1997-2006. During 2005-2006, farm real estate values increased 15.2%.” And Forster adds, “Land value impacts caused by Federal government farm programs are estimated to average 19.7% nationally, with large regional variation.”
Although some level farmland around Midwestern cities is consumed by large housing developments, some of the more desirable land for home sites is rolling and wooded, and has little value to agriculture. Forster says, “Annual conversion of land to residential and commercial uses totals about 2 million acres per year. Recent conversion of cropland is about 500,000 acres per year or about 0.1 percent of total U.S. cropland.” He says about 400,000 acres of pasture and 1,000,000 acres of forest land are converted annual to non-agricultural uses.
In consideration of its historical rate of return on investment, Forster says farm real estate is an attractive investment. It has also demonstrated low risk, an inflationary hedge and a good alternative for investment portfolios. Forster contends there are conflicts between private ownership of a natural resource, such as farmland, and the public good, however, those conflicts are controlled by such regulations as zoning, taxes, and other public policies. And if farmland continues to be converted to non-agricultural uses, land values would be expected to increase, along with higher rates of return.
Summary:
While there is a finite amount of land, its use is somewhat dynamic as seen by conversion of cropland and forestland to non-agricultural uses, and conversion of grass and rangeland to cropland. Ownership of land is overwhelmingly in private hands, and ownership is not a requirement to increase control of farmland by virtue of leasing. Ownership of land has been rewarded with good rates of return and most recently, substantial increases in value.
Posted by Stu Ellis on October 24, 2006 5:36 AM to farmgate