American agricultural real estate has caught the interest of investors both domestically and internationally. Between 1986 and 2008, Arkansas farmland values have steadily increased with a slight decline in 2009. All the sub-types of farmland (cropland, irrigated cropland, non-irrigated cropland, pasture and all farm real estate) increased in value since the data were collected in 1997 to 2008. The type of farmland with the most notable change in value over the last decade is pastureland. In the mid- to late-1990’s, pastureland had similar values as non-irrigated cropland. Beginning in 2002, pastureland began increasing in value faster than other forms of farmland, surpassing the value of irrigated cropland in 2006. This trend has been observed in states bordering Arkansas.
Many reasons can be suggested for the relative increase in pastureland values including pressure from urban sprawl and non-agricultural development, relative crop prices, investment, speculation and a host of others. Investors evaluate several economic indicators in their decisions regarding agricultural real estate. Economic indicators such as the Standard and Poor’s (S&P) Price to Earnings Ratio (PE) and long-term interest rates are important factors when considering investing in agricultural real estate. An indicator regarding agricultural land can be the farmland multiple, a measure similar to the S&P’s PE ratio for stocks.
The farm real estate to rent multiple values generally increased across the Mid-South and Mid-West up to 2007 and then decreased in 2009. The long-term trend has been for the multiple to increase although the general trend follows the trend of farmland values. Investors take several sources of information into account when considering investments, and agricultural real estate is no different. The risk preference of the investor and the risk-free interest rate plays a large part regarding how much investment capital enters or leaves the agricultural real estate market. Relative increase in crop prices beginning in 2007 impacted investors’ outlook for farmland and the annual rents that they could obtain.
International investors have watched the U.S., farmland market and have made investments appropriately. In recent years, South American investors have opted to purchase farmland in eastern Arkansas, foregoing the opportunities they traditionally chose in the Midwestern states due to the more attractive productivity to value to rent ratios. It is clear that Arkansas farmland is a part of the global economy and not simply a local commodity that only existing neighbors have an interest.
The United States Department of Agriculture – National Agricultural Statistics Service collects data on agricultural farmland values presented here. For more information contact your local country Cooperative Extension Service.
Terry Griffin, Ph.D, is an Assistant Professor of Economics at the University of Arkansas Division of Agriculture.
