Farm real-estate values in Arkansas have increased for the 15 th consecutive year, reaching $ 2, 300 an acre as of Jan. 1, up 12. 2 percent from a year earlier, according to an annual survey released earlier this month by the U. S. Department of Agriculture.
This steady growth in value stands in stark contrast to the 10 years from 1983 to 1992, when the state’s farm real-estate values declined by 25 percent.
Values have increased during the last decade and a half for a number of reasons, said Royce Bryant, a Memphis-based farm manager with Capital Agricultural Property Services Inc., a wholly owned subsidiary of Prudential Financial Inc.
“During the last six months, high commodity prices have tended to increase cropland values,” Bryant said. Increased demand for corn to make ethanol has led to reduced soybean acreage and created a ripple effect throughout the farm econ- omy. Prices for Arkansas’ major crops — soybeans, rice, cotton, corn, wheat and grain sorghum — are all relatively high with the one exception of cotton.
In the USDA survey, conducted during the first two weeks of June, agricultural producers representing a land area equaling about one-fifth of the state were asked about cropland and pastureland values, estimated building values, cash rents paid per acre and the estimated change in those figures from the previous year. Timberland wasn’t included.
Rick Bransford, a State Plant Board member who farms with his father near Lonoke, said Friday that increasing farmland values are good and bad for farmers: “Good if you’re selling and bad if you’re buying.”
In the state’s Delta region, people who do the actual farming own only about 20 percent of the cropland, overall. The Bransfords own about 45 percent of the roughly 3, 000 acres where they grow rice, cotton and soybeans.
Increasing land value hasn’t had an effect on the rental part of the family operation, Bransford said. Rental agreements generally are long term in nature. But, he said, someone trying to reach a rental agreement today might find the price affected by the rising land values.
Bransford said the family’s most recent land purchases were made in 1995.
Despite the rise in land values, property taxes have remained stable on farmland since 1996 because of a state law, said Robert McGee, an agricultural specialist with the Arkansas Assessment Coordination Department. However, state Act 994 of 2007 will put farmland on the same schedule for reassessments as other real estate beginning in 2008.
VALUE FACTORS Long-term farmland values in Arkansas’ eastern Delta region have been a function of such agricultural fundamentals as soil type and fertility, water availability, the crops for which the land is best suited and the eligibility of specific acreage for federal commodity- and conservationprogram payments, Bryant said. The location of farmland, including its distance from the nearest grain elevator or cotton gin, also is important, as are any improvements that have been made such as land leveling and the construction of irrigation systems and grain bins, he said. The average value of an acre of Arkansas cropland — not including land that has improvements such as buildings — increased by 8. 9 percent in 2006 to $ 1, 720, as of Jan. 1, according to the USDA’s National Agricultural Statistics Service. Good Delta cropland can fetch as much as $ 3, 000 an acre, experts say.
In 2006, the average value of an acre of Arkansas pasture increased by 20. 3 percent, reaching $ 2, 130 as of Jan. 1, almost double the $ 1, 160 national average. Land that has improvements such as farm buildings drives the state’s average acre-value up to $ 2, 300.
A growing pool of buyers also has tended to boost farmland values, said Scott Stiles, an agricultural economist based in Jonesboro with the University of Arkansas Cooperative Extension Service. So-called “1031 exchanges” have been especially popular since the early 1990 s, Stiles said. Section 1031 of the U. S. Internal Revenue Service code allows investors to defer capital gains taxes when they sell investment property by exchanging it for “like-kind” replacement property.
Pension funds and other large investors also began buying farmland in the 1990 s as a way to diversify their portfolios, said Jeffrey Conrad, president of Hanc/ock Agricultural Investment Group in Boston. Although Hanc/ock has tended to specialize in farmland for permanent crops like almonds, pistachios, walnuts and cranberries, about 40 percent of the $ 850 million of farm real estate that the company manages is in row cropland, including Delta farmland in Arkansas, he said.
Agricultural land is a desirable investment because it “tends to have a negative correlation or very little correlation with stocks and bonds,” Conrad said. Returns also have been strong, averaging 10. 7 percent annually for the last 15 years, according to the National Council of Real Estate Investment Fiduciaries in Chicago. Finally, some investors simply prefer the tangible nature of land to the intangible nature of so many investment alternatives, farm manager Bryant said.
Another factor tending to push farmland values higher has been nonagricultural demand, said Jason Henderson, an economist in the Omaha office of the Federal Reserve Bank of Kansas City. So-called “higher and better use” pressure for commercial and residential development on the fringes of metropolitan areas has led to the conversion of farmland across the United States, he said.
Such pressure in Arkansas has been concentrated in Northwest Arkansas and near Cabot, Conway, Jonesboro, Little Rock and West Memphis. American Farmland Trust, a Washington-based farmland preservation group, estimated in 2002 that the state had lost more than 16, 000 acres of farmland annually to urban sprawl between 1992 and 1997. The trust doesn’t have more recent data.
Much of Arkansas’ converted farmland was previously pastureland in the western half of the state, said Eric Wailes, an agricultural economist at the University of Arkansas at Fayetteville.
“I saw a 100-acre pasture west of Fayetteville priced for $ 55, 000 an acre,” Wailes said. “That’s an extreme, but I can assure you there’s a lot of pastureland in Northwest Arkansas priced and being sold at anywhere from $ 2, 000 to $ 10, 000 or $ 15, 000 an acre.”
Development-induced demand for farmland has abated somewhat recently, “because of the overall slowdown in the housing market,” Bryant said. Longer term, however, population pressure is likely to put continuing upward pressure on agricultural land values.
Recreational demand for farmland — be it for use as a hobby farm in northern Arkansas or a duck-hunting club near Stuttgart — also has tended to increase farmland values, said Ted Glaub of Glaub Farm Management in Jonesboro.
“That old trash ground that’s a swamp — that we used to try to get rid of because it wouldn’t do anything but collect ducks in the winter — it’ll bring two to three times the value of rowcrop land for recreational use,” Glaub said.
Another important nonagricultural factor affecting the state’s farmland values has been the boom in natural gas leases in north-central Arkansas’ Fayetteville Shale formation and the potential for royalties from energy companies.
“It has supported land sales and caused some price increases, but a lot of people are still struggling with trying to define just exactly what those values are,” Bryant said. Another problem is that many landowners don’t control the mineral rights.
One major unknown that will affect farmland values across the United States for the next five or six years is the pending renewal of the federal act that includes farm subsidies. The current legislation, passed in 2002 and set to expire at the end of the 2007 crop year, provided significant government subsidies for production of rice and cotton. The U. S. House of Representatives passed its version of the new farm bill July 27. “If the House version of the farm bill holds and the Senate has a very similar version, then that’s supportive of land values,” economist Stiles said. “It’s more or less an annuity or income stream for the landowner.”
CROPLAND RENTALS Compared to the increase in land values, Arkansas’ cropland rental rates rose at a more moderate rate, to an average of $ 80 per acre as of Jan. 1 from $ 76 a year earlier, according to the U. S. Department of Agriculture. The current average rate ranges from $ 56 an acre for nonirrigated land to $ 90 an acre for irrigated land.
Glaub said the amount that can be charged in rent is an important factor in cropland values since about 80 percent of the Delta is farmed by someone other than the landowner. Rented property is less common in the state’s pastureland.
Rental arrangements vary greatly, ranging from cash, in which the landowner is guaranteed a specific return, to crop share, when the landowner shares the weather and price risk of each year’s harvest with the tenant farmer. In a crop-share rental, the landowner generally receives 20 percent to 50 percent of the crop in payment for use of the land. The exact share depends upon how the landlord and the tenant share in the payment of such farming expenses as seed, fertilizer, chemicals and diesel fuel for irrigation pumps.
Under the 2002 Farm Bill, Arkansas cropland rentals tended to switch toward cash rental, said Luke Parsch, an agricultural economist at the University of Arkansas at Fayetteville. “But by far the most common rental arrangement for cropland in Arkansas is straight share rental,” he said, meaning the landowner provides none of the variable inputs, just the land and its improvements.
Experts agree that Arkansas’ cropland rental rates have grown more slowly than cropland values. Yet few are concerned that faltering land values might trigger a broader farm-economy collapse as occurred in the 1980 s. Land value declined in seven of the 10 years from 1983 to 1992, dropping during the period from $ 1, 096 an acre to $ 815 an acre.
Farmers in the 1980 s were more heavily indebted than farmers are today, Bryant said.
“Farmers’ debt-to-equity ratio is as low as it’s ever been since the government began tracking those numbers,” he said. “Most of the land is paid for and there’s a very low percentage of debt on it, so farmers can take some fluctuation in land prices and still have a pretty good balance sheet.”
