Farmland Values Continue To Increase Across North America

USDA recently released the 2011 version of its annual summary of farmland values and rental rates, with final values for cropland in Illinois of $5,800 per acre, representing an 18% increase. Cash rent serves as a proxy for current income, and averaged about 3.2% for the same period.

Total farm real estate values increased by roughly 16.3% for the year. Except for 2009, the past seven years have each seen double digit capital gains, and 3% to 4% annual current income. This performance during a period of unprecedented equity market volatility has resulted in substantially increased attention to the asset class, with an attendant increase in visibility of institutional investors, and resulted in some highly notable sales.

Some have begun to question the sustainability or rationality of the current levels, and have used phrases including “bubble” and “overheated”. At the same time, there is little evidence to suggest that income values and capitalization costs are anything but rational given the current low interest rates and high relative incomes, according to the report. But all of these descriptors: annual returns, capitalized values, volatility through time, are best viewed as relative indicators — if the equity markets had been returning 30% annually, the performance of farmland might look relatively poor, for example.

The rise in U.S. farmland prices is also washing across our border to the north. The value of Canadian farmland increased 2.1% during the last six months of 2010. That’s according to Farm Credit Canada, the nation’s leading agriculture lender.

Coupling that 2.1% rise with the 3% increase reported in the previous six-month update, results in an annual increase of 5.1% for the country’s farmland prices.