Despite soaring interest rates, farmland values in Oregon show no signs of slumping
After a record sales year for nursery growers in 2021, the economic outlook for the industry remains mostly positive (McClellan, 2022). One of the main economic issues facing producers is the increasing cost of labor, as general price inflation and a tight labor market have put upward pressure on wages. The rising cost of non-labor inputs, such as energy and fertilizer, coupled with widespread drought-like weather conditions, are among the other concerns cited by growers.
Despite these challenges, many producers have been able to raise prices and maintain existing profit margins without seeing a corresponding drop in sales (Nursery Management, 2022). Consolidation in the industry, however, remains a concern for smaller local producers, even though most growers do not plan to expand their acreage as much as they did in 2021 (Nursery Management, 2022).
All these factors can ultimately impact the price of farmland, as the viability and profitability of nursery operations can affect the demand for land and influence farmland values.
Farmland plays a foundational role in Oregon’s agricultural sector. In addition to being a fundamental input to production for most farm operations, farmland (and other farm-related real estate) is the largest asset on the U.S. farm sector balance sheet (USDA-ERS, 2022), making it the primary store of wealth for many producers.
Producers who own land often use it as collateral to secure loans to finance farm-related investments. However, while current landowners will generally benefit from higher land values, the price of land is often considered to be a major barrier for new and beginning producers to achieve a commercially viable scale of production (Brekken et al., 2016).
Compounding this accessibility issue is the notion that farmland is increasingly being used as an investment by actors outside the farm sector, including both domestic and foreign institutional investors (Hanson, 2022).
In this article, I provide an overview of the most recent publicly available data on farmland values in Oregon. The data are derived from an annual survey conducted by the U.S. Department of Agriculture’s National Agricultural Statistics Service (USDA-NASS, 2022a). In the survey, producers are asked to report an estimate of what their land would sell for in a market transaction.
It is worth emphasizing that these values are hypothetical, as opposed to being based on observed transactions. If the land that is sold is systematically different from the broader stock of Oregon’s farmland, the values discussed here may not line up with observed transaction prices.
The survey data provide information on cropland value (separately for irrigated and non-irrigated cropland), pastureland value, and farm real estate value (all land and buildings). Unless noted otherwise, all values discussed in this article are adjusted for inflation to the year 2022 using the GDP Implicit Price (U.S. Bureau of Economic Analysis, 2022).
Increases across the board
According to the most recently published USDA-NASS estimates, after adjusting for inflation, the per-acre value of land in Oregon in all uses has, with few exceptions, increased each year since 2011. Farm real estate value, which accounts for all farmland and other farm-related buildings, increased by 2.4% in 2022 to $3,040/acre, on the heels of a 5.5% increase in 2021, which was the largest annual increase since 2008. The 2022 estimate is also up relative to its most recent five-year average of $2,883.
Non-irrigated cropland — which, per the 2017 Census of Agriculture and 2018 Farm and Ranch Irrigation Survey, accounts for 73% of all cropland in Oregon — saw its value rise to $2,600/acre. That represented a 4.5% gain, which was the largest 2022 increase of any land value category tracked by USDA and the largest increase in this category since 2008.
The value of irrigated cropland also increased, but by a smaller 2.9% margin, to $6,350/acre, representing the biggest jump since 2016 in this category. Pastureland values increased by 2% to $900/acre, less than half of the 2021 increase of 4.5%, which was the largest annual percentage gain since 2008. The 2022 values for all three use-specific estimates are also up relative to the most recent five-year averages.
It bears emphasizing that the increases in the value of Oregon’s farmland are increases in real values, after adjusting for inflation. The unadjusted, or nominal, increases are far larger than those reported here. For example, the nominal value of non-irrigated land increased by a whopping rate of 11.1% over the past year.
What this means, in general, though, is that the rate of appreciation in the value of Oregon’s farmland is faster than the pace of inflation. Have the returns to farming increased at a similar, above-inflation clip?
One challenge of studying farmland value in Oregon is the state’s highly diverse and varied agricultural sector. It’s therefore difficult to make generalized statements about farm-related returns for any specific commodity. This stands in contrast to a state like Iowa, for example. There, we would expect the net returns to cropland to track closely with corn and soybean prices, as these crops are grown on the dominant share of cropland in the state.
Cash rents stay flat
As a measure of use-specific statewide net returns to owning farmland, we can consider cash rents, which are collected annually in another USDA survey (USDA-NASS, 2022b).
Cash rents are a commonly used measure of net operating income, as they partly capture the annual return an off-farm landlord would receive for owning land. However, renting land is less common in Oregon compared to other states.
In 2017, the most recent year of data available, 30% of Oregon’s farmland was rented, compared to 39% nationwide (USDA-NASS, 2019), which calls into question how representative rented land is of the broad stock of farmland in the state, especially given that not all land is rented under a cash lease agreement.
With these caveats in mind, both non-irrigated and irrigated cash rents remained flat over the past year, while pastureland rents declined slightly, by 1.7%. Non-irrigated cash rents, at $101/acre, are below the recent five-year average of $105/acre. Irrigated cash rents, on the other hand, are up at $261/acre, a 4% increase relative to the five-year average of $251/acre.
The average pastureland rent of $11.50/acre is down 13% relative to the five-year average of $13.20. Despite most commodity prices being up, landlords are likely finding it difficult to raise rents given the simultaneous rise in the price of many farm inputs, including labor, fuel, fertilizer and electricity. Rising input costs are partly due to the international trade issues brought about by the Russia-Ukraine conflict (Colussi et al., 2022).
Overall, these trends in cash rental rates suggest that the most recent rise in Oregon’s farmland values are not directly attributable to rising farm profits.
Factors fueling the boom
Despite cash rents being relatively flat, the USDA numbers suggest that farmland in Oregon continues to appreciate in value. With state-level statistics like this, it is difficult to tease out exactly what is causing land values to increase, but several factors broadly align with these trends.
For one, there are interest rates. Low interest rates bolster the value of farmland by increasing the present value of expected net income derived from land in future years.
Much of the talk surrounding interest rates in recent months has concerned their rapid rise due to tighter monetary policy by the Federal Reserve in efforts to rein in inflation. However, the USDA survey where the land value estimates come from was taken in June of 2022, which preceded the biggest rises in interest rates that started throughout the summer and into fall. As a result, we can attribute some of the gain in value to the low interest rate environment that producers were facing when they answered the USDA survey.
However, even when interest rates begin to rise, it can take several years for higher rates to be reflected in the market for farmland (Basha et al., 2021).
Another factor that is likely keeping upward pressure on Oregon’s farmland values is the federal income support provided by the Inflation Reduction Act stimulus funds (Myers, 2022). Although the act was not passed until August of 2022, there was likely some expectation on the part of producers that federal support was in the offing, as farm income has been bolstered in recent years in response to the Covid-19 pandemic and trade war with China.
Per a recent analysis by Northwest Farm Credit Services (2022), the supply of available land in Oregon remains low relative to demand, particularly from institutional and other investment-oriented buyers. There is also strong demand for rural residential land, which has become more desirable as more and more people are able to work remotely and thus become untethered to locating in close proximity to their office.
In addition, although housing market activity has dampened of late, the price of homes in many parts of Oregon remains high, which puts additional pressure on the expansion of urban growth boundaries and bids up the price of undeveloped farmland in close proximity to the existing boundary.
Daniel Bigelow is a land economist in the Department of Applied Economics at Oregon State University. He can be reached at Daniel.Bigelow@OregonState.edu.
Basha, A., W. Zhang, and C. Hart. 2021. “The impacts of interest rate changes on US Midwest farmland values.” Agricultural Finance Review, 81 (5): 746-766. DOI: https://DOI.org/10.1108/AFR-11-2020-0163.
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Colussi, J., G. Schnitkey and C. Zulauf. 2022. “War in Ukraine and its Effect on Fertilizer Exports to Brazil and the U.S.” farmdoc daily (12):34, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign.
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Growing Knowledge from the March 2023 issue of Digger magazine | Download PDF