Farmland as solid base for food industry
June 8, 2012
Hardly anything has more positive connotations for the food industry than agriculture having a positive economic outlook. As tempting as it might be to look on above-average crop, livestock and poultry prices as sources of cost and margin pressures, it is much smarter to understand the way in which favorable prices received by farmers in recent years have created a strong food industry base. Of course, the prime beneficiaries are the farmers. The importance lies in how the current situation differs from those periods when agriculture suffered with dismal prices. Current prosperity assures maximum efforts to produce, working exactly opposite from what happened during the farming recession of the 1980s. The latter led to a multiplicity of concerns about food production trends, both in quality and quantity.
Many measures exist to assess how well agriculture is doing. Record-setting farm income is often cited as evidence. After all, net farm income in 2011 came within a hair’s breadth of $100 billion and net cash income approached $110 billion, both new records by a wide margin. Just as important is the prospect that even as some crop prices have eased, the 2012 experience points to only a minimal setback in these measures. According to the U.S. Department of Agriculture, net farm income “is a measure of the increase in wealth from production,” and the reductions anticipated this year are among the smallest ever posted.
As telling as net farm income may be in gauging the underlying strength of the business that produces food crops, hardly anything is a more realistic measure than farmland values. These values are not just at record highs, as represented by farmland in the U.S. averaging $2,350 per acre in 2011, but the annual advances are themselves impressive, up a whopping 22% in the Middle West in the past year. This rise followed annual gains of 10% in the preceding several years. The significance of this escalation increases because it is driven mainly by farmers seeking to expand their production capacity, whereas past dealings in farm real estate were typically dominated by farmers seeking to exit production and purchases being made by investors.
That this rising trend has persisted is all the more amazing when it is remembered that this period witnessed one of the most devastating declines in urban real estate values in history. Low interest rates, reflecting Federal Reserve steps to stimulate housing demand, are judged of minimal consequence until recent housing gains. Yet, these low interest rates are believed to have provided great incentives to farmers to pursue expansion.
Indeed, the historically low interest rates are joined with the favorable crop and livestock prices in spurring the climb to record farmland values. The recent period is unique for the way the values were supported by the earnings of farmers. This is strikingly different from earlier periods when farm real estate prices much lower than current levels were hardly justified by what may be earned from owning the land. For many years, there was hardly any correlation between farm income and farmland values, bolstering the idea that farmland values were largely dependent on non-agricultural factors.
Now that the opposite has become central to assessing farmland values, attention is being paid to possible sources of downward pressures on values, including the possibility of a “speculative bubble.” A rise in interest rates obviously would weigh on farmland values. A sharp cutback in direct support payments under new agricultural legislation seems almost a certainty in light of budgetary pressures, and these payments have gone on long enough that they have been capitalized into farmland. Having avoided any negatives from the collapse of housing prices, farmland values should not suffer from housing recovery. Regardless of the way these forces play out, the food industry ought not misinterpret the benefits from what has occurred in the past five years as well as the dangers from a reversal anytime soon.