Wednesday, March 7, 2012
Land Prices: They're Just Not Making Any More of It
Sometimes on the Sundays when we don’t get out to Hawksbill Cabin, I find that I have time to catch up on some back issues of “Progressive Farmer” – we first got this subscription when we installed the new gas heating systems from Southern States, and renewed it since then. Funny, but the publication started out in Greensboro, NC, and I’ve heard that some of my family members were early subscribers, reading every issue cover to cover.
Since I was in catch-up mode, I found that had three issues with reports on sales recent farmland, so I did a little analysis in the attached table, which is sorted by price per acre.
There is a full range of sizes and uses, with the improved farmland drawing the highest prices. On the other hand, the “recreational land” – essentially timber land where you can also hunt, was at the lower end. It’s all about values, I guess.
I also took a look at a November special issue about risk. This piece, “Land: Love it or Leave it” by Deb Keller, speaks to how farmland prices have increased dramatically since 2004. She finds that the reason for the price increases are increasing demand, skyrocketing commodity prices, and pressure from outside investor interests.
One impact of the boom in prices, Keller finds, is a bank in Indiana that wants a 35% down on land purchases. She closes the article with an analysis that compared the current value of $1,000 invested in 1960 in Iowa farmland…that 3.63 acres would be worth about $170K now, while an equal investment in the S&P 500 would be worth at around $95K. Even so, with prices for agricultural products being what they are, these individual land buys probably don’t pencil out – they’ve got to be averaged into existing production acreage, and they probably have to be 100+ acres at that.
The other issues in this group all have articles about land prices, alternatively discussing whether there might be a bubble, whether there is a correction coming, and how young farmers just starting out might find financing or other resources to start building their acreage. Everything comes back down to cash flows – I’ve done a few posts on the topic before – and I just don’t see how you get there on small ground.
As far as the prices go, I always think about it this way: It’s land. They’re just not making any more of it.