October 28, 2021

Owning farm and ranch land is normally a long-term decision whether it is a producer buying the land to expand their operation or an investor wanting to have ag real estate in their asset portfolio. Current economic factors such as commodity prices and loan rates coupled with current market factors such as the supply of land for sale or the number of buyers are immediate but ever changing considerations when putting a price on farm and ranch land.

Since ag land is a longer term investment, projections of multi-year economic factors have to be taken into account when making purchasing and pricing decisions. This is when it is prudent to try to project the income generated by the land over a longer time period as it is the income that ultimately supports the price of a real asset over time. Net income from land is simply commodity yield times commodity price minus input expenses. All three factors in determining income can vary widely from year to year and place to place.

One projection to consider is will the income generated by farmland be above average, average, or below average over the next 10 plus years? The below graph from Agricultural Economic Insights (Widmar and Gloy) provides a historical perspective on how Net Farm Income in the US has performed over the past nine decades. This can be useful in making general projections about the direction of farmland income on average in the future and how that might affect land prices now and, in the years, to come.

Next week we will discuss another longer-term consideration in pricing land which is capitalization rates or cap rates.     

Randy Dickhut  

Senior Vice President - Real Estate Operations 

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