To think about the future, you have to study the past too.

The average value of an acre of Texas rural land jumped 4.5% in 2017 to an average value of $2,644.

© Lands of Texas

As with other income generating real property assets such as commercial buildings, net income is important in valuing farm and ranch land. Income that the asset generates over the years is the underlying basis in determining the asset’s value. Of course there are other important factors that affect the value of land such as interest rates, supply of land for sale, buyer demand, and the return on competing investments. All these factors have an influence on the price of land at any given moment in time, but the basis of value is the income generated over the long run.

To think about the future, you have to study the past too. One chart that we can look at is the 90 year history of real net farm income from 1929-2018 adjusted to 2017 dollars, during which average just above $80 billion dollars. There were three main periods of above average net farm income accounting for 28% of the time. These were the WW II/Korean War years, the early 1970s, and the recent run up in incomes this decade. Near average incomes were experienced 26% of the time over the nine decades. Below average net farm income happened 46% of the time or nearly half of the 90 year period.  

An interesting aspect of the 90 year period is that after the first two main periods of above average incomes (1940’s and the early 1970s), there was a period of years with average to below net farm incomes lasting 20-25 years. Since the most recent income peak in 2013, we have experienced five down years ending up in the much below average territory. Net farm income for the two most recent years falls around $64-$69 billion which is much below average.  
 
While net farm income was dropping nearly 50% during the past five years, land values dropped less than half that amount. As was said, other factors such as low interest rates and a good equilibrium of buyers and sellers supported land values. The supply of good land for sale dropped over 40% from the high number of sales in 2012-13 to 2018. Less land for sale on the market was an important factor in the moderate decline in land values in recent years.  

Agricultural land values have been surprisingly resilient over the past two years despite the continuation of depressed farm incomes and shrinking working capital. Supportive factors combined to hold land prices in most areas, especially for good quality farmland. Concerns are building in the land market primarily surrounding the financial health of farmers and ranchers.  

Going forward, net farm income is forecast to rebound somewhat, but it is dependent on demand for grain, world crop sizes, and world economic conditions. Will we be in an extended period of average or below incomes or will things be different today because of world population growth, scarce resources in parts of the world, and the growing list of uncertainties surrounding agriculture?  

This commentary was provided by By Randy Dickhut, AFM RDickhut@FarmersNational.com

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