Source: blog by Randy Dickhut, AFM, Senior Vice President – Real Estate Operations, Farmers National Co., Omaha, NE
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, demand to buy, and the return on competing investments. All of 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.
To think about the future, you have to study the past. One chart that we can look at is the 90 year history of real net farm income from 1929 to 2018 adjusted to 2017 dollars. Average U.S. net farm income during this time frame was near $80 billion.
There were three main periods of above average net farm income accounting for 28% of the time. Near average incomes were experienced 26% of the time. Below average net farm income happened 46% of the time or nearly half of the 90 year period. Net farm income for the two most recent years falls around $64 to $69 billion, which is much below average.
An interesting aspect of the 90 year period is that after the first two main periods of above average incomes (1940s and the early 1970s), there was a period of years with average to below net farm incomes lasting 20 to 25 years. Since the most recent income peak in 2013, we have experienced five down years ending up in the much below territory.
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.
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?