April 2008
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As Residential Property Values Decline, Farmland Soars

By  Alvin Benn

 
  From left, Walt Prevatt and John Adrian, Auburn University agricultural economics professors, issued a report pinpointing factors pertaining to the drop in farmland usage and increase in farmland values.
Family housing values around the country may be declining rapidly, but the price of farmland out in the country continues to soar.

The days of $300-an-acre farmland a few decades ago are distant memories for those who can now get more than $3,000 an acre.

It’s even more amazing when today’s land value is compared to those after World War II when troops returning home could buy farmland for just under $50 an acre.

One of the reasons for the tremendous increase in value is the availability of farmland or, in this case, the lack thereof today.

The old saying "They don’t make any more land" could never be truer in Alabama and across the United States.

In 1950, there were about 20 million acres of farmland in Alabama. Today, it’s down to 8.6 million acres.

That’s a stunning decrease and one few Alabamians are aware of. Just as the price of land has increased, so have the reasons for the drop in farm acreage and the switch to other uses.

Encroachment by developers building high-cost houses, apartment units and condos have a lot to do with the decrease in farmland.

The ups and downs of farmland value and other factors have been closely monitored by two Auburn University (AU) professors who have pinpointed factors for the huge drop in farmland usage and a big jump in farmland values.

Some are easy to understand, especially for farmers who remember the sharp drop in values during the early 1980s. That’s when interest rates topped 20 percent and wiped out many farmers, particularly those who grew soybeans.

Farmland values have risen and fallen during the past 30 years, but recent studies have shown a sharp upward trend. That’s understandably good news for those who till the soil.

According to Auburn agricultural economics professors John Adrian and Walt Prevatt, the value of farmland in Alabama has jumped by double digits for three years in a row.

Their seven-page report, issued a few months ago, said the current value of $3,100-an-acre in Alabama has resulted from a combination of factors.

"Favorable interest rates, a popular tax incentive and outside demand for land by non-farm investors all have contributed to the high values for farm real estate in the state, particularly over the last three years," said Adrian.

During an interview with the Cooperative Farming News, the AU professors explained their extensive analysis of Alabama farmland returns and values from 1970 to the present.

Using figures by the U.S. Department of Agriculture, the two professors examined farmland values during individual decades since 1970. They also studied farm real estate values during the current decade of the 21st century.

Adrian and Prevatt determined farmland values increased an average of 14.2 percent a year during the 1970-81 decade which was considered the "boom years."

Values dropped more than seven percent a year during the down decade of the 80s, improved during the 90s and have risen sharply this decade, especially during the past three years.

The two men said when they conducted their study, they had no intention of trying to "prove a point."

"We didn’t want to make any broad sweeping statements about what our food policy should be," said Prevatt. "We’re just trying to say something about what’s been happening to our land values and cash rent situation."

He said farmers around the state have been contacting him and Adrian about their report, wanting to learn more about it and discussing their personal stories with them.

"Most of the farmers who call us feel good about their investment in land and how good their balance sheets look," said Prevatt. "Some also complain ‘I’m worth a lot of money, but I make a poor living on this high dollar land.’"

Adrian said land values have made many Alabama farmers "very wealthy," but that’s on paper, not in the bank.

"Their cash flow is poor," he said. "Only a few of them make a lot of money by selling their land. There’s just something about farmland that makes it tough to sell. They don’t want to give up their land."

An AU article about the study conducted by Adrian and Prevatt said outside interest in farmland had a lot to do with the double-digit value increase.

Adrian said outside investors desiring farmland and those using the federal "1031" exchange tax provision were key elements of the increase in farm property values.

The federal provision allows people who sell their farm property to defer payment of capital gains taxes by sinking their "windfall" profits in similar property investments somewhere else.

Adrian and Prevatt said the federal law has affected prices "as farmers have sold high-value land near urban areas and subsequently bought farmland in more rural, lower-cost areas and states."

Both men grew up on farms — Prevatt in Florida and Adrian in Alabama — so they are no strangers to the vagaries of agriculture.

Both have agricultural doctorates and are approaching senior citizen status, but memories keep them close to the soil they prepared for planting as young men.

"I grew up on a family-owned diversified farm," said Prevatt. "I gained much knowledge and discipline from my involvement with these agricultural enterprises."

In addition to getting his hands dirty during planting and picking seasons, Prevatt said he also "benefited greatly from the management and operational responsibilities I experienced while serving as a partner of the family farm."

The farm where Adrian lived in Cherokee County was similar to most around Alabama and it offered him hands-on experience just like Prevatt.

"Our farm was pretty much the same as most in Alabama — about 200 acres or so with a little Ford tractor to help with the heavy work," he said. "We were self-sustaining. So were all the other farmers back then."

Adrian said the landscape in Cherokee County has changed drastically in the past half century, just as it has in Alabama’s 66 other counties.

"All you’ve got to do is drive through Cherokee County today and see all the $250,000 houses," he said. "A lot of them were built on what used to be farms. That’s a lot of high dollar land and that’s why many farmers finally decide to sell."

Times have changed and so has food production in the U.S. In the "old days," nearly all food items in America were grown within its borders. That’s not the case today. Importation of foreign-grown food continues to increase.

"Hopefully, we won’t make the same mistakes in food production in this country as we did with our energy situation in the 70s," said Prevatt. "We don’t want to be held hostage to high food prices as well as fuel."

Prevatt believes as long as the American consumer is satisfied with their food supplies, they won’t raise much of a fuss unless prices get out of hand and supplies are reduced.

"We’re importing more than ever," he said. "As long as there is cheap food in this country I don’t think anybody’s going to be too concerned about it."

Although the availability of farmland has shrunk more than 50 percent in Alabama in the past 60 years, the production from what’s left leave the two Auburn professors amazed.

"This is a heck of a success story," said Prevatt. "Here we are, producing on less than half of what we had been using and the food you’re eating today is cheaper than it’s ever been."

Adrian couldn’t agree more and points to statistics showing the "average" Alabamian consumes about 2,000 pounds of food a year. Of that, more than 260 pounds come from foreign sources. That’s about ten percent and could go higher if current trends continue.

Modern technology has a lot to do with maintaining and often exceeding food supplies, said Adrian. Picking cotton by hand went out with the Edsel and production hasn’t skipped a beat.

One reason for the drop in farmland usage is the decision by many farmers to convert crop and pasture property into forests. Pine trees may take awhile to grow, but can provide favorable returns for the owner.

What concerns Adrian and Prevatt is the drop in rental revenue for farmers. They said the average price today is $19.50 an acre.

"Nobody really sets a price because rental and purchase prices are what the landowner and renter is willing to charge and pay," Prevatt said. "What’s nice to see is that seven percent increase in real value of farmland over the past 20 years."

The "supply and demand" theory appears to be more relevant than ever when Alabama agriculture is concerned.

The demand for land is gobbling up pastures and row crop property across the state, but the supply of food from what’s left hasn’t diminished — it’s risen.

It may seem to be an agricultural anomaly, but it’s also become a fact of life in the 21st century in Alabama.

Alvin Benn is a freelance writer from Selma.