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Investing in Organic Farmland

The Profitability of Owning Farmland

Written by Briton Ryle
Posted August 16, 2013

So you’re enticed by the growing demand for organic foods and feeds – not to mention the premium prices wholesalers and consumers pay for them – but aren’t so keen on the farming aspect itself. Perhaps land ownership is more to your liking, collecting a tidy rent while you wait for its value to rise enough to cash out handsomely.

nz farmAnd you wouldn’t have to wait too long to cash out at a profit, either, if the current rate of farmland appreciation continues. According to a recent survey by the U.S. Department of Agriculture, farmland in the 48 continental states rose 9.4% over the past year, from an average of $2,650 per acre to over $2,900.

That certainly beats many of the alternative investment choices out there. But is such growth in U.S. farmland sustainable? Or is it attributable to temporary conditions that come and go? Can using the land for organic farming make the enterprise more viable?

Land Values Tied to Commodities

Like any other business, the value of farmland and the operation on it is highly dependant upon the value of the products it produces. When crop commodities rise in price, so does cropland. When cattle and hogs rise in price, so do ranches.

This can work to the farmowners’ advantage during a short drought, as the shortage of the products produced causes commodity prices to rise. If the farmer locks in sales at those high futures prices, he can either make a fortune on next year’s crop, or sell the entire operation – including the land and the short futures contracts – to a new farmer for stellar prices.

This is precisely what has contributed to the recent skyrocketing values of farmland and the operations on them. As the drought of 2012 drove agricultural commodity prices through the hayloft, farming operations enjoyed elevated valuations for their properties. Cropland values rose an average of 13% nationwide, 20% in Minnesota, 30% in South Dakota, and a bumper 42% in North Dakota.

Farming will also have a knock-on effect, where a rise in value in one type of land will raise other types as well. For instance, as crop values rose last year, not only did cropland rise but pastureland did as well. As cropland became more expensive, new farmers started buying pastureland and converting it to cultivate the more expensive grains, reducing the amount of pastureland and thus raising its value as well. Where pastureland rose 4% nationally, it rose 17% in Minnesota, 20% in South Dakota, and 29% in North Dakota.

But if rising agricultural commodities can lift farmland with them, it is inevitable that falling food prices will drag farm values down. The recent fall in commodity prices has prompted Dwight Aakre, farm management specialist at North Dakota State University Extension Service, to express his concern to the Grand Forks Herald, saying, “I think land prices have peaked.”

Despite terrific annual rises in the values of various farming operations, “in the last few months, the growth rate has been coming down,” Ernie Goss, MacAllister Chair in Regional Economics at Creighton University in Omaha, Nebraska, revealed to AG Web. “Softer corn and soybean prices, the stronger dollar, and slower economic growth globally are all combining to put a dent in the growth in farmland values.”

Goss added that “rising interest rates could also take a little air out of the land-price bubble.” While he expects 7-8% annual growth in farmland value to be more realistic, the recent “growth rates of 23%, 15% are not sustainable.”

Organic Farming’s Premium Incentives

Hence, the value of any farmland is greatly dependant on its use. As Michael Duffy, economist at Iowa State University, writes in his blog, “One of the key variables to watch is income...There is an 89% correlation between land values and net farm income.”

Whether you’re planting a crop or breading a herd, growth in the value of your produce will ensure growth in the value of your land. And that’s why many farmers are going organic.

While it is true that most of the mark-up in organic foods is made by the vendor, organic farming operations are receiving more for their crops than their non-organic counterparts, with more economic incentives being made available all the time, as outlined by the USDA Economic Research Service in its review of the 2008 Farm Act:

  • Certification cost reductions: Organic farmers must obtain certification qualifying them to sell their products as organic and charge a premium price. The 2008 Farm Act has provisions for “cost-share assistance … to help growers and handlers with organic certification costs”.

  • Transition assistance: “Aimed at helping producers with the transition to organic farming systems.” Payments to reimburse farmers for their transition costs are available up to a $20,000 annual limit, to a total of $80,000 over six years.

  • Crop insurance at higher crop values: Currently, eight organic crops can be insured at values greater than their non-organic conventional counterparts, including corn, soybeans, cotton, processing tomatoes, avocados, and several fresh stone fruit crops. Recently, Secretary of Agriculture Tom Vilsack promised to make six to ten additional organic crops eligible for insurance at higher values than their non-organic cousins, with oats and mint already earmarked for inclusion, and apricots, apples, blueberries, and millet under consideration.

All such incentives could greatly enhance the profitability of any new organic farming operation and its land.

Organic foods are premium products with outstanding growth prospects. Whether you choose to cultivate these specialty foods yourself or simply lease the land to others, any land that has undergone the three-year conversion process from conventional farmland to organic will enjoy a premium specialty value compared to non-organic farms well into the future.

Joseph Cafariello

 

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