Fueled by an increase in plant-based fuels, farmland prices are exploding. National farm real estate values increased by 15 percent in 2005 and 11 percent in 2004, according to the USDA's Agricultural Land Values and Cash Rents summaries. Increases were attributed to a combination of factors, including "low interest rates and strong demand for nonagricultural uses."
Demand for farm real estate as an investment also continued to be strong, according to the report. These double-digit price increases have attracted interest from non-farm investors, which has further fueled prices, according to The Corn & Soybean Digest.
Iowa, the nation's biggest producer of ethanol, saw pasture values rise 21.5 percent and cropland prices rise 10.5 percent in 2005, according to the USDA. Between September 2006 and March 2007 alone, Iowa's farmland prices "surged 13.6 percent...adding to a total year-over-year increase of 16.5 percent, the second-highest rate in 20 years, according to the Iowa Farm & Land Chapter No. 2 Realtors Land Institute," BusinessWeek said.
It is clear that alternative fuels such as ethanol have begun to have a dramatic impact on farmland values.
Increased consumption
Our planet is steadily producing more and more people, but its supply of farmland is limited. As populations grow, more land is converted to housing developments and away from farming; this is especially common around growing city centers.
A limited supply of water for irrigation also limits the supply of quality farmland in many parts of the world.
As the world's population grows and worldwide demand increases, commodity prices are rising. More people require more food, and more uses for crops mean that other usage is competing with food consumption.
Corn is used as livestock feed to produce chicken, pork and beef. The world's appetite for corn, meat and fuel is growing at a rapid pace, and this is putting increased pressure on corn-producing farmland.
The U.S. dominates the global corn export market, with a 71 percent market share, according to the USDA. Global corn consumption has risen by 15.8 percent during the last five years, and that number is expected to grow another 5.85 percent in the next year, according to the USDA.
"The global grain market is expected to remain tight in 2007/08, as rapidly expanding consumption once again outstrips production," the USDA said. As a result, the USDA expects the world's grain reserve to continue depleting for the third straight year, "falling to the lowest level in more than 25 years."
"The global tightness in corn is driven by use in the United States where, despite sharply larger acreage and forecast record production, the rapid expansion of use for ethanol will continue to cause tight stocks [reserves]," the USDA said.
Total farmland acreage is not increasing, but allocation of existing farmland is shifting as corn prices rise and more farmers decide to grow corn rather than other crops.
Energy demands
The 2005 Energy Policy Act and President Bush's January 2007 State of the Union address have increased pressure to develop renewable fuels—particularly ethanol.
"Strong expansion of corn-based ethanol production in the United States affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops," according to the USDA Agricultural Baseline Projections for 2007-2016.
Increased demand and higher corn prices also affect the livestock sector, which relies heavily on corn to feed livestock.
The USDA projects that more than 30 percent of the corn crop in 2009/10 will be used to produce ethanol, but that ethanol will still only represent less than 8 percent of annual gasoline use in the U.S. at that point.
It is clear that biofuels can have a huge impact on agriculture while still making a relatively small impact on the energy sector. Ethanol requires a lot of corn for production—the new dry mill ethanol plants are assumed in the USDA projections to have a production yield of 2.8 gallons from a bushel of corn.
While corn used to produce ethanol in the U.S. is projected to continue strong expansion through 2009/10, the USDA expects growth to slow in subsequent years. Corn-based ethanol simply will not be able to fully satisfy energy demands, and other renewable energy sources that don't compete for farmland will be needed.
A limited supply of farmland, world population growth and demand for corn and meat products should provide a solid demand for farm products and farmland well into the future, with or without ethanol.
Investment strategies
Investors who want to take advantage of rising farmland prices can use one of several investment strategies. A simple buy-and-hold strategy is one way to take advantage of price appreciation. This is even more effective when combined with another strategy, such as renting the land to a farmer to generate cash flow.
Farmland purchased in the path of a city's progress will likely rise in value as the city expands. In the meantime, renting the land or even farming it to produce organic foods can create some cash flow.
Local organic produce is growing in popularity, particularly near larger cities, where customers are willing to pay a premium for fresh local products. Organic farms on the outskirts of an expanding city center can sell their products at higher prices and eventually benefit from the land appreciation caused by the expanding city.
Another new trend in farmland is the farm community, as recently highlighted by the Wall Street Journal. Developers are now offering homes at a wide range of prices on working farms; and many of these new communities are in suburbs or near cities, according to the article. This lifestyle appeals to many, especially retirees and families with young children.
Creative strategies such as these may enable farmland investors to achieve both appreciation and cash flow from their investments.
A Dwindling U.S. Farmland Supply
| |
# of Farms |
Acres of farmland |
| 2006 |
2,089,790 |
932,430,000 |
| 2005 |
2,098,690 |
933,210,000 |
| 2004 |
2,112,970 |
936,295,000 |
| 2003 |
2,126,860 |
938,650,000 |
| 2002 |
2,135,360 |
940,300,000 |
| 2001 |
2,148,630 |
942,070,000 |
| 1995 |
2,196,400 |
962,515,000 |
| 1990 |
2,145,820 |
986,850,000 |
| 1970 |
2,949,140 |
1,102,371,000 |
| 1950 |
5,647,800 |
1,202,019,000 |
Source: U.S. Department of Agriculture
