LITTLE ROCK — High commodity prices and an increase in investors have driven up farmland values in the state and country.
The value of cropland in Arkansas rose an average of 6.5 percent last year from 2010, and the value of farm real estate, which is land and buildings used for production, rose by 4 percent, according to a land-value report by the U.S. Department of Agriculture.
In 2011, farm real estate in the state was valued at an average of $2,600 per acre and cropland was valued at $2,120 per acre, according to the report.
Current farmland prices in eastern Arkansas are between $3,500 and $3,850 an acre, said Scott Stiles, agricultural economist in Jonesboro with the University of Arkansas Cooperative Extension Service.
Stiles said farmland values are on the rise because of historically high commodity prices and an increase in investors.
The value of farmland varies depending on the type of farm, said Greg Cole, president and chief executive of Ag-Heritage Farm Credit, a Little Rock-based farm lender.
He said some farmland in eastern Arkansas was priced at $3,300 an acre at the end of 2011 — a 9.4 percent increase from 2010. In the western part of the state, farmland was priced at about $1,600 an acre — a 12.3 increase from 2010.
Farms in the eastern part of the state typically concentrate more on crops, such as soybeans, rice and corn, while in the west the focus is more on poultry and cattle, Cole said.
Stiles said that in some areas, land has reached premium prices in recent months, with tracts between 2,000 and 5,000 acres being bought by investors for $4,000 to $4,200 an acre.
“Most investors are looking to purchase 1,000-acre tracts or larger,” Stiles said in an e-mail. “Smaller tracts reportedly hold little interest to investors unless these border property they currently own.”
International and domestic investors have been big buyers of farmland the past few years and they typically pay in cash, Stiles said, adding that they normally look for about 4 to 5 percent return on their investment.
“As a result of this type of farmland acquisition, many local [agriculture] lenders report that their overall real estate loan volume has decreased as a result of the sales.” he said.
Investors are attracted to farmland because it is a stable investment, said Gar Lile, president of Lile Real Estate, which deals with agriculture properties in the state.
“You got investors seeking better investments other than the stock market,” he said. “Agriculture land provides a more secure and less risky investment in the long term.”
For example, the Standard & Poor’s 500 index was unchanged between 2010 and 2011 and lost 11.3 percent in the five years from Dec. 29, 2006, to Dec. 30, 2011.
Because many investors lease the land to farmers, they have two types of returns: rent from the lease and profits from crops, said Randall Pope, president of Westchester, an agricultural-asset manager that operates globally.
He said the growth of returns from crops, which has done well because of exports, has helped boost farmland values.
“So while everything has been depressed in the U.S., farmland is doing really well,” Pope said.
The surge in farmland values is part of a national trend as land values in the Midwest and the Great Plains are up by more than 20 percent for the first quarter of the year, said Jason Henderson, vice president and Omaha, Neb., branch executive for the Federal Reserve Bank of Kansas City in Missouri.
“We have seen a strong, bullish run,”he said. “That has been driven by stronger farming.”
Other states have seen significant increases in farmland values this year, according to quarterly reports by the Federal Reserve Banks of Kansas City and Chicago. For example, in Nebraska, farmland values have increased this quarter by 41.1 percent, according to a report released earlier this month by the Federal Reserve Bank of Kansas City.
“Our process here is still considered modest in the actual price compared to the Midwest,” said Cole, the executive from Little Rock-based AgHeritage Farm Credit. “And land up there is about three times the cost.”
The reason states in the Midwest and the Great Plains are increasing at a rapid rate is because of the value of crops produced is higher, said Michael Pakko, chief economist for the Institute for Economic Advancement at the University of Arkansas at Little Rock.
“Those are big corn-producing states,” he said. “In Arkansas, rice is a much bigger crop, and on world markets we haven’t seen a big increase for rice as we have corn.”
Arkansas farmers are doing more selling than buying, compared with their counterparts in other states, said Stiles, the agricultural economist with the UA Cooperative Extension Service.
“These particular farmers are paying down debt or decreasing their need for comparable levels of credit by converting farm real estate equity to cash,” he said. “Farmers appreciate the historically high levels of today’s commodity prices and overall farm profitability.”
Ron Plain, an agriculture economics professor at the University of Missouri, said the increase in farmland values in the U.S. is part of a long-term trend where prices typically rise about 6 percent a year.
“The fact it is headed up isn’t quite shocking at all,” he said. “But the rate of increase has been greater than the long-term trend.”
If values continue to rapidly increase in the next few years, it is likely that there will be a farmland “bubble” and rates will become unsustainable and “pop,”’ Plain said.
Stiles said the recent weakness in cotton prices might stabilize farmland values in some counties in Arkansas.
“For the time being, farm real estate sales are brisk,” he said. “However, a weaker commodity price outlook may begin to slow demand.”
Farmers do not think that the high land values will continue to rise rapidly, Stiles said.
“We may be at or near the end of the boom phase,” he said. “As commodity prices soften, that could have a stabilizing effect of land values — in contrast to a bust.”
Front Section, Pages 1 on 05/31/2012