NOW HIRING!

Commercial real estate industry insights.

Valuing a Growing Real Estate Market: U.S. Farmland

by | Apr 20, 2023

Tech billionaire Bill Gates who amassed a fortune in the computer software business is making money in one of the world’s oldest professions: farming. The former Microsoft chief, who is the country’s largest private landowner, is counted among investment firms, developers, farmers and others who have benefited from stellar growth in U.S. farmland valuations, reaching historic highs last year.

According to USDA reports, U.S. cropland values hit an average of around $5,000 per acre, up 14 percent from the prior year, which also reported a record year in valuations. But that figure is small potatoes compared with values for some farmland, ranging from about $20,000 per acre in the Midwest and the Pacific Northwest to around $40,000 per acre in some parts of California. High quality vineyard land more than doubles these indications.

There are various reasons for the increases in the nation’s farmland values. Low-interest rates in recent years, strong commodity prices, foreign investors paying healthy premiums for U.S. agricultural land, COVID-induced urban flight to rural areas, a diminishing supply of arable land, and other factors have led to strong valuations for this property type.

Adding cropland to investment portfolios has appealed to many investors for years because of its attractive ROI, low price volatility compared with other asset classes, asset diversification, and it offers a decent hedge against spiraling inflation.

Valuing Farmland Differs From Other Property Appraisals

Determining the worth of farmland, however, differs widely from other types of real estate valuations. Valuing agricultural land needs the right expertise and knowledge of local markets to meet the unique and complex requirements for ascertaining the property’s appropriate market value.

For example, valuation considerations vary regionally and could include water access, mineral rights, soil composition, topography, location of irrigation systems (above and below ground), exposure to weather conditions, proximity to non-agricultural areas, road access, among other things.

For rangeland properties, appraisals can cover water sources for cattle, AUMs (animal unit month) which is how livestock the land can support in a month, recreational activities, fencing quality, government grazing contracts, and possible timber values.

The types of agricultural uses also matter in the valuation process. Vineyards are typically appraised at much higher valuations than farmland used for row crops like corn and soybeans.

Proximity to major highways also is added to the equation in figuring out agricultural land valuations. Farmland located closer to highways can help produce higher valuations because growers can ship their crops to market faster and cheaper than those farms located in remote locations.   

Agricultural appraisals sometimes require metrics unexpected to those outside of this niche. For instance, valuing Midwest farmland may consider how many times a harvester needs to turn in a field or how many wet head (lactating) are in a dairy. It is up to the appraiser to understand their local market and metrics that drive value.

Additionally, these valuations take into account certain events changing agricultural operations. For example, more people bought farmland in the Pacific Northwest to drive to escape congested living areas during the pandemic, resulting in an increase in sales of mid-sized to small farms. This, in turn, led to sellers buying larger parcels of farmland, causing a further escalation in farmland costs.

A number of those farms are now “hobby farms”, or lifestyle-type properties that don’t make enough revenue from crop sales to be considered the sole source of income. In Oregon, for instance, those farms are typically 40 acres or less.

In California, massive wildfires could have a significant impact on the valuation of vineyard operations in the central and northern parts of the state. In recent years, wildfires caused major damage to the state’s wine grape crops. That could possibly lead to reduced valuations for some of the vineyards if wildfires continue to spread in the region.  

It’s unknown if and when current economic conditions will significantly affect U.S. farmland values nationwide, as valuations in some areas may continue to prosper or remain stable while other areas could experience lower property values. But if history is any indicator, the longer-term outlook for agricultural land valuations is promising, driven by shrinking farmland acreage and increasing food demand.   

BBG offers skilled professionals who are uniquely qualified in the intricacies of agricultural land appraisals and possess a deep understanding of local markets impacting farmland valuations. To discuss how BBG can assist with farmland transactions, contact www.bbgres.com.

Sydni Nicolici is BBG’s director of agricultural appraisals in the Pacific Northwest and president of the Oregon chapter of the American Society of Farm Managers and Rural Appraisers.