The Farm Real Estate Economy :: essays papers

The Farm Real Estate Economy Farm real estate values have increased continuously from 1987 to 1998, significantly improving the financial position of many farm businesses. But for the first time in over a decade farm real estate prices have begun to fall, due in part to record breaking yields for crops and extremely low commodity prices. I believe the value of farmland has increased at too fast a pace in relationship to value of farm production and is facing a major market adjustment. The farm real estate market saw it’s last major market adjustment in the mid 1980’s (see figure 1), many operations went out of business and the banking industry lost millions. In many cases the value of the note the bank was carrying was in excess of the value of the land securing that note. Although the market adjustment I anticipate will not be as drastic as the crisis of the 80’s, I do believe many lending institutions are in place to take some serious losses if the federal government suspends it’s p ayments to farmers. Farmland currently accounts for slightly over 79 percent of all farm sector assets, which now exceed $900 billion. Some 52 percent of total farm sector debt, composed of either mortgages or short or intermediate term debt are secured by farmland. Consequently, the financial security of farm sector borrowers and their lenders is affected by changes in farm real estate values. Agricultural land values are primarily determined by the income earning potential of the land, as measured by expected returns from crops and livestock. However in many areas, nonagricultural factors are playing a greater role. Where non-farm influences are involved, farmland is often drawn out of agriculture for residential, commercial, or recreational uses. Farmland values in rapidly urbanizing areas, like the outskirts of Lincoln for example or in areas popular as recreation destinations tend to be higher than would be predicted based on agricultural returns alone. Research has found that 10 to 20 percent of the farmland in the United States is effected by population expansion. This may seem like a small percentage of the total farmland in this country but in many instances in urban areas land is valued at five times it’s production capability, or higher. This however is not taken into consideration when valuing the real estate in the farm sector as a whole. This problem is most prevalent in the Northeast United States.