There is evidence in the broader farmland market trends that would indicate that this historically dependable asset class is showing signs of fatigue following years of steady price increases. Farmland transactional sales have been leveling out for the past 18 months, the availability of capital flowing into the market is shortening due to challenges in meeting return on investment benchmarks, and the increasing profitability challenges facing farm families all combine to create a noticeable shift in the market.
Farmland has long been regarded as one of the most stable and enduring asset classes across the country because of its scarcity, essential economic role, and the steady capacity to generate both income and long-term appreciation. In today’s financial environment, which includes elevated interest rates, challenging commodity markets, and persistent pressures from higher input costs, producers and investors alike are working to understand the current financial viability and the lasting impacts to asset value. A closer look at the derivatives of viability will lead to a better understanding of the impact to farmland values.
Agricultural viability refers to the ability of a farming operation, crop system, or ag production enterprise to remain profitable, productive, and sustainable over time. Given the current set of market circumstances, it becomes clear that direct amounts of energy must be expended in each of the three categories.
Profitability. It has been said that working in agriculture requires living an “agriculture lifestyle.” However, it is important to understand that underlying all activities in agriculture is the need to support what consistently has become a modest lifestyle as producers work to remain profitable.
Profitability leads to many positives that ensure that producers can meet the demand created in the marketplace now and into the future. Without profitability, farm equipment can become obsolete or broken down. Without profitability, families cannot meet their most basic needs, causing them to look elsewhere for a livelihood. Without profitability, innovations that lead to greater productivity will not be able to be included in the farming operation. Without profitability, the likelihood of being able to maintain the value of farmland from one generation to the next becomes more challenging.
In short, profitability in the farming operation has a direct correlation to the long-term value of farmland, whether it is owned by the farming producer or not.
Productivity. Never in the history of growing food to feed the world’s population have we experienced per acre crop productivity like we do today. That productivity continues to be optimized through scientific and cultural advances, while reducing waste in all its forms, and allowing for efficient use of machinery across the entire industry. Productivity is optimized and currently runs on razor thin margins.
The correlation and impact to farmland value is direct. During the past 15 years, we have experienced growing farm productivity that has added to overall achievable per acre rents, bolstering financial returns that have justifiably led to an influx of interest from external capital sources. This added capital has fueled an unprecedented upward cycle in farmland values across a relatively short period of time. There are some in our industry that would consider our current farmland value cycle as an “overheated market” that will require commodity prices and rents to continue to rise to keep pace with growing land values.
Because farmland values have historically appreciated gradually over time, we look very closely at annual impacts to productivity and price points of the produce grown to determine directional changes. The past 24 to 36 months across various sectors from wheat, tree fruit, forages, and specialty crops have seen broad weakness in demand and external world trade-related impacts. These weaknesses, however, have not yet pushed per acre land values substantially lower. Time will tell how sustained pressure plays out across the farmland asset class.
Sustainability. This requires owners, operators, and consumers to make decisions today that will be impactful to the viability and value of productive farmland in our country in the future. Farmland is the type of asset that requires true vision as well as patience and determination during times of lower returns. Sustainability includes a full understanding of each intrinsic value found in farmland ownership and advocating for policies that include protection and support for farmers and farmland owners for generations to come.
Sustainability truly includes close attention to overall stewardship, profitability, and productivity from the onset of management decisions. Some of the best ways to ensure that farmland assets remain is to take a close look on an annual basis at what improvements and maintenance can be done right now within the power of the stakeholders to keep farmland viable. At the end of the day, it will require control of the controllable inputs among us all to ensure value in the greatest land on earth.
Tim Cobb is a farm kid from Eastern Washington and is the owner of Farmland Company, based in Spokane, Wash. Farmland Company specializes in direct farmland management, real estate brokerage, and consulting across the Pacific Northwest. For more information, visit the company’s website at farmlandcompany.com.
