“There are many reasons for the current increase in farm real estate and cropland values, such as historically low-interest rates, improved farm economy, increased demand of farmland for urban use and other outside investments,” Dean Klahr, director of stockgrowers at Kansas Livestock Association, told The Center Square.
While a good thing for some farmers, the situation puts a bit of a squeeze on those looking to expand or acquire more farmland.
Klahr said if a farmer or rancher currently owns the land, an increase in the property valuation can improve the operation’s borrowing power by increasing the net worth of the operation. Increased net worth can also improve the farm’s financial position for the next generation, should the farm be passed on. Historical trends show land values tend to appreciate at a stable rate and at a rate faster than that of inflation. As a result, lenders have a higher willingness to lend for the purpose of farmland acquisition.
“The average Kansas farmer is nearly 60 years old,” Klahr said. “With many producers reaching the age of retirement, those who wish to sell the land will likely receive a premium over the price paid for the asset.”
For the aspiring farmer, though, increased property values pose a challenge to their potential livelihood.
“No matter the type of agricultural production, land is essential in this industry,” Klahr said. “Start-up costs are already extremely high, and increased farmland values only increase that barrier to entry.”
Most beginning producers are on the hunt for land to lease instead of purchase, but those in this position are often hurt by increased farmland values in correlation with higher rental rates. Klahr said that higher rental rates then decrease margins and make it more difficult to generate enough capital to purchase the land, especially at an increased value.
“Additionally, agricultural producers are at increased risk of losing leased properties should the landowner decide to sell at a price the current tenant can’t afford,” Klahr said. “This is especially common with farmland near urban centers, where farmland appreciates in value at a significantly higher rate.”
In addition to land, farmers are also having a difficult time getting their hands on everyday farm supplies, as the supply chain has been severely disrupted by COVID-19. It is likely that any gains made by increased crop sales, additional land and supply costs could zero them out.
By Kimberly James