Is Farm Real Estate Pricey Compared to Farm Income?
The Ag Economists recently published an article discussing farm prices relative to farm income, you can find the article at the following link: https://ageconomists.com/2017/09/11/farm-real-estate-pricey-compared-income/
My first thought, and I would guess most first thoughts would be that of course right now farm real estate values are high relative to farm income. Based on the information in the article, this would be a correct assumption.
The article first looks at farm income on an accrual basis compared to real estate value and keep in mind all values have been inflation adjusted. The average from 1960 – 2016 was 25%, or one dollar of farm real estate value generated $0.25 of income. Today that ratio is just $0.16, meaning less income is generated per dollar of farm real estate value. Next, the article looks at net income to real estate value by taking into account cost of production. The ratio averaged 6% over the time frame, today’s value is just 2.5%. Basically, as was expected, from a historical perspective farm values are high compared to the net income generated. This becomes even more important when you consider that farm real estate value represents 83% of total farm assets.
One caveat on this is that this analysis lumps all farms together. There could be certain geographic areas or crops with much different results; while that analysis would certainly take much longer to compile it would be interesting to see this information broken our further. As the article concludes, this does not necessarily mean real estate values are set to fall, incomes could rise or a number of other combinations could occur. But, these ratios due indicate a warning flag.
Special thanks to David Enquist for this post.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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