We’re used to thinking of escalating rents as an urban problem, something suffered mostly by the citizens of booming cities. So when city people look out over a farm—whether they see corn stalks, or long rows of fruit bushes, or cattle herds roving across wild grasses—the price of real estate is probably the last thing that’s going to come to mind. But the soil under farmers’ feet has become much more valuable in the past decade. While urban commercial real estate has skyrocketed in places like New York, San Francisco, and Washington, D.C., powerful investors have also sought to turn a profit by investing in the most valuable rural real estate: farmland. It’s a trend that’s driving up costs up for the people who grow our food, and—slowly—it’s started to change the economics of American agriculture.
Think of it this way: If you wanted to buy Iowa farmland in 1970, the average going price was $419 per acre, according to the Iowa State University Farmland Value Survey. By 2016, the price per acre was $7,183—a drop from the 2013 peak of $8,716, but still a colossal increase of 1,600 percent. For comparison, in the same period, the Dow Jones Industrial Average rose less than half as fast, from $2,633 to $21,476. Farmland, the Economist announced in 2014, had outperformed most asset classes for the previous 20 years, delivering average U.S. returns of 12 percent a year with low volatility.
That boom has resulted in more people and companies bidding on American farmland. And not just farmers. Financial investors, too. Institutional investors have long balanced their portfolios by putting part of their money in natural resources—goldmines and coal fields and forests. But farmland, which was largely held by small property owners and difficult for the financial industry to access, was largely off the table. That changed around 2007. In the wake of the stock market collapse, institutional investors were eager to find new places to park money that might prove more robust than the complex financial instruments that collapsed when the housing bubble burst. What they found was a market ready for change. The owners of farms were aging, and many were looking for a way to get cash out of the enterprises they’d built.
And so the real estate investment trusts, pension funds, and investment banks made their move. Today, the United States Department of Agriculture (USDA) estimates that at least 30 percent of American farmland is owned by non-operators who lease it out to farmers. And with a median age for the American farmer of about 55, it is anticipated that in the next five years, some 92,000,000 acres will change hands, with much of it passing to investors rather than traditional farmers.
But what about the people—often tenant farmers—who actually work the land being acquired? During the same period that farmland prices started gaining steam, many crop prices have stagnated or fallen. After hitting highs above $8 a bushel in 2012, corn prices today have fallen back to less than $4 a bushel—about what they were ten years ago, in 2007, when farmland prices first started to soar.
It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst?
Three big factors have contributed to the rapid increase in the prices paid for farmland—which is usually defined to include grazing land and forests—according to Wendong Zhang, an assistant professor of economics at Iowa State University. (Zhang tracks farmland prices, especially Iowa farmland prices, which are among the best documented in the country.)
First, interest rates, since the financial crash of 2007–2008, have been at historic lows, which tends to drive asset prices up. There has been “phenomenal growth” in the ethanol market, Zhang says, linked to increasing interest in sustainable fuels. Indeed, if you graph ethanol production over the past 20 years, it shows exactly the same explosive growth as land prices. And as exports to China and elsewhere have increased, farm income has risen. “Farm income is the variable to track” in analyzing land prices, Zhang explains.
“Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”
But there’s an additional factor: well-heeled investors are snapping up farmland, driving prices up. Here’s how the Economist explained it: “Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”
And, says Craig Dobbins, a professor of agricultural economics at Purdue University, “Farmland and other real estate investments are good investments to balance the risk of investments in stocks and bonds. These buyers are sensitive to the expected rate of return that will be received from the purchase of such an investment. If farmland values rise to levels that it does not appear the investment will provide the threshold rate of return, they will not purchase. The location preferences of these buyers are much more flexible than an individual farmer.”
Institutional investors can and do buy land in every region and of every type: cropland in the Corn Belt, rangeland in cattle country, or fruits and nuts in California. Among the big players are TIAA-Cref, BlackDirt, Hancock Agricultural Investment Group, American Farmland Company, AgIS Capital, and Gladstone Land Corporation. There are other institutional investors as well, showing a cross section of financial interests in the relatively stable investment that land represents over time. According to RD Schrader, a real estate broker of farmland based in Colorado, “The number of investors is growing, and because of that, it occurs more often and makes the marketplace more fluid. With the downturn in values now, the institutional investors help keep the land values more stable.”
That sounds great if you want to sell land, as many American farmers, approaching retirement age do. But from the viewpoint of sustainability, there are many disadvantages to consolidating farmland in the hands of financially oriented landlords.