Land Ownership and Use
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Land Ownership and Use


– Chapter 21 from the Kent
Olson textbook is on land ownership and use. We’ve talked indirectly about
land ownership and use during the semester, but this chapter
kind of brings everything together and ties it all in
together here as one lecture. So land value is a function of
farm income – what can I get off that farm land – and
non-farm income, which is land appreciation, sometimes
referred to as inflation. So farmland’s always going up,
there’s an inflation factor and it could be going up
because the uses of income. Now there’s other factors.
There’s natural resource factors. There’s recreation opportunities.
There’s hunting, open space interest, water quality,
alternative investment, historical considerations.
There’s a number of things that come in when it comes to looking at land. And if you think about just the
overall capitalization rate, again we’re not gonna talk
about financial formulas in this class, but you should know that
the cash rent, or the income coming off an acre of land
divided by the capitalization rate, the discount factor or
the interest opportunity cost, that’s equal to the Net Present
Value of future returns on land, and we’ll show
some examples of that. So that makes this thing unitless. So I pulled some data together
here from the US Department of Agriculture, the Economic
Research Service, and if you look at the farm income from
land over time, these two lines intersect so the nominal value
is below the base here of 2009, and the inflation adjusted
value then is right there. If you look what’s happened,
since the late 1960’s we’ve had a steady increase in the price of land. Some of that’s due to income.
A lot of that’s due to inflation. Here is some more data that
I pulled together from the US Department of Agriculture. So
they go out and collect data annually on land prices. Each
land grant university like the University of Minnesota, we
collect land parcel data and make that available in a spreadsheet file. So I’ve just pulled some data
together here for Illinois, Indiana, Iowa, Minnesota,
Nebraska, and Ohio. And I’ve looked at irrigated,
so irrigated land here is in gray, non-irrigated is orange,
and pasture ground is in blue. And if you look what’s
happened there, these are the average land prices going
up over the last 15 years. Here is the average cash
rental rates per acre. So this acts as a different,
this is in dollars per acre here. This price in dollars per
acre, but the units here are different than they were on
the land, and we’ll show that here in just a second. So if
you look at what’s happened here, price rental rates have
gotten almost flat in the last few years. We’ll look at some trends. So here I’ve taken the ratio
of cash rental rates to land prices per acre from
the two previous slides. I’ve taken this data, the
rental rate, and I’m dividing it by the land price. So this is
the denominator right here. This is the numerator.
And I’ve made that ratio. So what is that ratio? A
concept I’ve been talking about this semester is how to make
something unitless, and I’ve done that here today. I’ve
taken the ratio of cash rental rates divided by the land
prices. Both of these are in per acre, and both of them are
from our previous slides. So here’s my numerator.
Here’s my numerator, the cash rental rates per acre. Here’s
my denominator, the average land prices per acre. So
here’s my denominator. Here’s my numerator,
and here’s the result. Again, orange is non-irrigated land. Gray is irrigated land,
and blue is pasture. Let’s start with blue. Pasture
ground, the ratio of income, if you will, from cash rent
divided by the land price, is almost flat during this whole
time period, and it’s very, very low. It’s less than two percent. If you look at the gray, which
is irrigated land, that’s gone down from what we saw before. And that’s gone down from six
percent down to a little bit under five percent. And if you
look at non-irrigated land, that’s gone from a little over
six percent and that’s gone down to just over five and a half percent. So, if you think about what’s
going on here, what determines cash rents, the numerator, and
land prices, the denominator? It reflects the erosion
of net income per acre. So go back to these states.
These states are heavy corn production states. These
states are heavy soybean production states. And so
therefore as the net income’s come down because prices have
come down, yields were going up, prices are coming down,
you see the reduction in the erosion of net income per acre. But irrigated land appears
to hold its value slightly better. Why would that be the case? Well, irrigated land has got
water, consistent water, and if you got water rights, people
are gonna track to buy that land. And so you’re gonna
find people more interested in that land. So we see declining
farm income as a principle reason why we’re seeing
decline in land values and cash rents. What about non-farm
income, or land appreciation? Let’s think about pasture
ground for example. Pasture ground’s got other
factors such as natural resources, recreation,
hunting, open-space interest, water quality, alternative
investment, historical considerations. It’s used
as pasture just literally putting cow out there and
letting them eat the grass. There’s very little inputs,
and so therefore you’ve got a cash rental rate divided by
the land rate of about two percent. It’s got a pretty
constant ratio of cash rental rates. It’s a low opportunity
cost for cattle production. Non-farm incomes are needed
to stabilize this ratio, and so people might buy that
land for hunting purposes. They might buy it because
they want recreational purposes. So the only value
that land will have alternative value to increase that two
percent is gonna have to find someone who’s looking for
something other than cattle production. A lot’s been said
about hunting leases, and so here if you look at the
Kansas State University has a publication on hunting leases.
They talk about the different types of hunting leases here,
what are they, and what is the amount you can get off that.
So again, pasture ground could be used for hunting leases. Here I pulled some data together
from a recent publication looking at US farmland. So
in the fall of 2018, a recent publication says that farmers
are gonna plant more corn acres in the spring of 2019.
In fact, one publication says that the amount of corn land
increase will be equal to the state of Connecticut for the
spring of 2019 if we don’t change the soybean tariff with China. So the Chinese don’t buy soybean
meal from the United States in the fall of 2019, farmers
are gonna plant more corn. And so if that’s the case,
that may be reflected in US farmland, because farm income
is still gonna reduce itself. So what are some people saying here? There’s a low supply of land. So when you have a low supply
of land, we’re gonna have strong interest. Lower quality
of land going back to my comment on irrigated land.
Irrigated land tends to have more buyers because you know
you’re going to have water. So farmers tend to be the
largest buyers of land. Almost three-quarters of all
land sales done by farmers, but a farm income’s going
down, they may not buy as much land. But as people say,
going back to our first slide, or second slide, land is
always increasing in value over every decade that we’ve
got recorded data for. So land inflation continues to happen. So what are things that influence
land values for next year? So available cash by farmers,
supply of land on the market, commodity prices, which
influences net income. US trade policy issues, so
China does have renewable fuel standard, however they stopped
buying corn ethanol from the United States in 2016,
actually January first 2017. And so they started importing
US corn from the United States and importing corn from
Argentina to make their ethanol blends for them. Interest
rates again, as interest rates go up, that may detract some
buyers. Optimism in rural America, do people think
the trade war’s gonna end. Global demand for food, again,
a lot of corn and soybeans are being used in ingredient
uses. And how many people out there might be interested in buying land. So what do I wanna know today? If you look at questions 1, 3,
and 4 from page 408, I could modify those for test questions. And in fact I’ve done that
in the past, if you look at previous exams. And that
explains why lenders help follow land prices, because land
prices are a principle part of the farmer’s net work. We spent
a lot of time in this class talking about net worth and
how the farmers, what causes net worth to increase or
decrease, land asset, if you think about going back to the
accounting identity. Assets is identical to liabilities
plus equity or net worth. Land on the assets side, net
worth on the other side of the balance sheet. Those are highly
correlated with each other. You should know the
differences in trends between irrigated, non-irrigated,
and pasture ground. And finally you should know
what the ratio of rental rates to land value mean.
I’m making something unitless and what’s the overall trend
in the last five to eight years on that particular variable.

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