Farm Income 4th On List of Reasons to Purchase Farmland

The Kansas City Federal Reserve puts out a quarterly survey on credit conditions in their region and the latest survey for the second quarter had some interesting trends.  Due to lower wheat prices and the continuing high feed costs, their farmers actually had lower-income for the quarter.  However, farmland prices continued their upward trend, up about 25% for irrigated cropland year-over-year and about 18% for non-irrigated cropland.  Even rangeland prices were up about 14%.

However, for me, the interesting nugget out of these farmland price increases is the reasons why listed in order:

• The wealth effect – farmers have had several years of high income which has increased their wealth substantially, leading to a desire to purchase more farmland and more importantly, having the wealth to purchase more farmland,
• The current low-interest rate environment – With rates at decade lows, it is much easier to purchase farmland at higher values and still have it cash flow.  If rates go back to more normal levels, this effect will reverse,
• Lack of alternative investments – With CD rates at 1% or less, farmers are more likely to purchase farmland that will return more than that rate and still have some upside potential,
• Finally – farm income expectations – The income generated by the farmland is the 4th reason for purchasing farmland.  Over time, this reason should revert back to #1 and in that case, the first three reasons may lead to lower prices, not higher.

The quarterly survey is always interesting to read and I highly recommend taking a look at it.  It is only five pages long and whether you live in that region or not, you will find something interesting in it each time.

Paul Neiffer, CPA