The federal government recently published several studies that shed some light on why investors often turn to farmland during troubled times. It’s because farmland rarely loses value.
The U.S. Department of Agriculture’s highly anticipated 2024 farmland value survey, which was released in August, showed continued asset appreciation of U.S. farmland over the past 12 months. In fact, nationwide cropland increased in value by 4.7% when compared to 2023. And it’s up a staggering 37.2% since 2020.
In top agricultural states where Farmland Partners has a sizeable portfolio, like Illinois and California, cropland values were up 3.2% and 3.0% respectively in the last year, and 30.8% and 31.7% since 2020. This continued rise is significant considering what is going on in the economy.
The Federal Reserve’s Beige Book, released in July, said that low commodity prices are dragging down farm incomes. The Federal Reserve Bank in Chicago, which is watched closely in Midwest agricultural circles, offered some additional color.
“Farm income expectations for the district waned in late May and June as key crop prices declined,” it said. “Contacts indicated that farmers were slow to sell crops from storage and were holding back on selling ahead from their anticipated fall harvest in part because of low prices.”
Combine the softening farm economy with the recession of recent years, and resulting high interest rates, and farmland’s performance becomes even more impressive. But why does farmland continue to appreciate?
It’s largely due to the simultaneous forces of ever-increasing need for food around the globe and fewer acres of high-quality farmland.
“Farmland is the rare investment opportunity that combines growing demand with shrinking supply,” explained Green Street Advisory Group in their 2021 farmland investment primer. This, the paper noted, has helped farmland values achieve “a nearly uninterrupted rise over the past ~30 years.”
In addition to supply and demand, farmland’s appreciation strength is further helped by farmers’ bottom lines, which is a function of both crop prices and productivity gains. So even when crop prices go down, efficiency gains can help smooth out the rough patches.
“Steady and growing yields from best-in-class U.S. farming operations have helped balance the fluctuation in commodity prices,” Green Street noted. Plus, “the U.S. government deems the agricultural sector so essential to a functioning society that it provides support mechanisms to farmers, which provides another layer of income stability.”
The result, says Farmland Partners CEO Luca Fabbri, is usually peaks and plateaus in the farmland market instead of peaks and valleys.
“Unlike traditional real estate, which can be prone to volatile price swings, farmland usually moves in a positive direction,” he said. “In tough times, growth may be slower or even temporarily stagnant, but in good times, values can climb swiftly and steeply. And this appreciation is a key component of farmland’s overall return for investors”
No wonder we appreciate appreciation so much.
Note: This article contains Forward Looking Statements.
