What is in this article?:
- Soaring farmland values have led many people to raise the question of whether or not farmland is on a speculative ‘bubble’ and due for a price correction.
- Strong economic fundamentals—rising incomes and a limited number of farms for sale—appear to be driving recent land price gains.
- Farmland values will be shaped by economic returns and the highly volatile markets make the future path of farmland values very uncertain.
Who is Buying Farmland?
Another issue surrounding land values and the current situation is the changing nature of the land ownership. The changing demographics of land owners will have an influence on who will farm the land and how it will be farmed.There are two trends in land ownership that warrant consideration. One trend is who is buying the land and the other is the aging land owner population.
Who is buying farmland is a subject of much discussion. Anecdotal evidence suggests that there has been a significant increase in institutional and fund purchasing. Yet, data from the Midwest shows that existing farmers remain the primary purchasers of farmland. (Duffy, 2011b; Schnitkey, 2011) As a result, farmland is purchased primarily by existing farmers. In Iowa, during 2010, 70 percent of the land was purchased by existing farmers. In Illinois, 56 percent of the buyers were farmers. Other states show similar trends.
Moreover, who is allowed to buy farmland depends on the area of the country. In some areas, farmland ownership is restricted. For example, eight states have restrictions on corporate land ownership and 11 states have some level of restriction on foreign ownership.
Still, there has been a recent shift in who is purchasing farmland. Although farmers represent the majority of purchasers in many states, the relative percentage of land bought by farmers had decreased while investor purchases have increased. From 2000 to 2007, the percentage of Iowa farmland purchased by farmers fell below 60 percent, compared to 80 percent in the early 1990s (Figure 3). At the same time, the percentage of land purchased by what were classified as investors rose from less than 20 percent in the early 1990s to almost 40 percent in the mid 2000s. During the early part of the past decade many investors were using IRS 1031 like-kind tax exchanges in purchasing farmland. With the recent increase in income, farmers have become more aggressive in the farmland market, but so have investors. The collapse in the urban real estate market and the drop in interest rates caused many investor and fund groups to look to farmland as an alternative investment opportunity, increasing the demand for farmland.
Yet, when transferring farmland ownership, few owners expected to sell the land to nonfamily members. In 2008, only 8 percent of Iowa farmland owners indicated they intended to sell the land outside the family. The rest of the land was either going to be inherited, gifted, sold to the family, put into trust or disposed of in some other manner. Interestingly, in 1982, 13 percent of the land was going to be sold outside the family. (Duffy and Smith, 2008)
It is unclear, whether or not people will carry out their intentions regarding the disposition of their land. However, there does not appear to be any increase in the amount of land being sold on the market, at least not in Iowa. The preliminary results of the study examining Iowa land sales data shows 1.5 percent of Iowa’s cropland was sold in 1990, 1.9 percent was sold in 2005, 1.3 percent sold in 2009 and 1.4 percent sold in 2010.
Despite sharp land value increases in 2007, rising land values had little effect on Iowa landowner plans. When asked about the impact of rising land values, 80 percent of the owners said higher farmland values would have no impact on their plans regarding keeping or selling their land. Moreover, 54 percent said higher farmland values would have no impact on land purchase plans, while another 43 percent said they were less likely to buy land. (Duffy and Smith, 2008)