November 2014
Ag Insight

Ag Insight

Farm real estate values hit new high

Farm real estate – including both land and structures - accounts for 82 percent of the total value of U.S. farm assets, according to the latest available data.

Worth $2.2 trillion, the real estate value comprises a significant portion of the U.S. farm sector’s asset base and any change in the number is a critical barometer of the farm sector’s financial performance.

Change in farmland values also affects the financial well-being of agricultural producers because farm real estate is the largest single component in a typical farmer’s investment portfolio and serves as the principal source of farm loan collateral.

After the 1980s farm crisis when farmland prices declined in response to rapidly rising interest rates and energy costs, farm real estate values have trended upward.

Despite expectations of lower farm income, U.S. farm real estate values have continued to increase this year.

Data show differences in farm sector’s share of food dollar

Data from USDA’s Economic Research Service show major differences in the farm sector’s share of food dollars spent on various products.

Comparing the bakery-products dollar with the red meat dollar highlights the larger role of processing and marketing costs for processed foods. For bakery products such as bread, crackers, cookies and other sweet goods processing costs were the largest cost component at 37.7 cents, a recent study showed. Farm production costs were one of the smallest components at 2.3 cents, a total smaller than packaging and advertising.

In comparison, processing costs made up 18.1 cents of the beef, pork and other red meat food dollar. Farm production and agribusiness costs of 26.6 cents were the largest cost component. Agribusiness includes the services and products used by farmers such as veterinary services and fertilizer.

Economic growth in developing countries is good news for farm exports

Developing regions account for an increasing share of global gross domestic product, a measure of total economic output. That’s good news for farm exports because consumers in developing countries tend to spend larger shares of their disposable income on food.

Relatively high rates of gross domestic product growth in developing regions, particularly China and other developing Asian countries, have boosted developing countries’ share of global gross domestic product from 21 percent in 1990 to 27 percent in 2000, and about 38 percent in 2014.

China and developing Asia together accounted for 34 percent of U.S. agricultural exports in fiscal 2013, while developing countries as a whole accounted for 65 percent.

USDA long-term projections for agriculture, which assume continued income growth in developing countries, indicate that developing countries will account for more than 90 percent of the growth in world imports of meats, grains and oilseeds over the next decade.

Dairy consumption gains driven by higher milk-fat products

U.S. consumption of dairy products is expanding, with the fastest growth occurring in products with relatively high milk-fat content.

USDA’s Economic Research Services estimates consumption of fluid milk and other dairy-containing products in two different ways: one based on the milk-fat content of the various products (milk-equivalent milk-fat basis) and the other based on the skim-solids (proteins, lactose and minerals) content of the products (milk-equivalent skim-solids basis).

Since 1995, commercial disappearance on a milk-equivalent milk-fat basis has grown twice as fast as disappearance on a milk-equivalent skim-solids basis. This pattern reflects increasing U.S. per capita consumption of cheese, butter and other products with relatively high milk-fat content, along with declining per capita consumption of fluid milk.

Irrigation data show better efficiency in water usage

While the amount of irrigated land in the West has increased by over 2 million acres since 1984, the amount of water applied has declined slightly as irrigation systems have shifted toward more efficient methods.

In 1984, 71 percent of Western crop irrigation water was applied using gravity irrigation systems that tend to use water inefficiently. A recent study shows farm operators now are using more efficient systems, with gravity systems accounting for just 48 percent of water for crop production while pressure-sprinkler irrigation systems that can apply water more efficiently account for 51.5 percent.

Much of the acreage using pressure irrigation systems included drip, low-pressure sprinkler or low-energy precision application systems. Improved pressure-sprinkler systems have meant a remarkably stable agricultural water use since 1984, as fewer acre-feet were required to irrigate an increasing number of acres.

Farm sector’s financial position remains strong

The rate of growth in farm assets, debt and equity is forecast to moderate in 2014, the result of an expected decline in net farm income, higher borrowing costs and moderation in the growth of farmland values.

The value of farm assets is expected to rise 2.3 percent in 2014, while farm sector debt is expected to increase 2.7 percent. Even with the expected slowdown in asset growth, the sector’s financial position remains strong due to the historically low level of debt relative to assets and equity.

The sector continues to be well-insulated from the risks associated with commodity production such as adverse weather, changing macroeconomic conditions in the United States and abroad, and fluctuations in farm asset values that may occur due to changing demand for agricultural assets. n