Will the Current Slowdown in the Ag Economy Flood the Market with Farmland Sales?

Two researchers answer: While a deluge is not likely, a trickle here and there is.

By Richard Banks

Minnesota farmer Craig Holm recently took over a 600-acre operation from a neighboring producer who was retiring. The timing of that retirement was due in part to the recent decline in commodity prices. Craig wondered aloud if other farmers might do the same.

Considering that, on average, farmers in North America have never been older and that many of them have remained in the business due to recent record-breaking years for farm income, we asked two researchers the following question:

Could the softening of the North American farm economy and decreases in commodity prices finally convince older North American farmers to retire and in the process free up more farmland?

Those researchers are Todd Kuethe and Jennifer Ifft, who along with Allison Borchers, recently authored a study on factors that influence the price of agricultural land. You can find a summary of that study, “Linking the Price of Agricultural Land to Use Values and Amenities,” here.

While Ifft and Kuethe’s study dealt mainly with agricultural land prices in the U.S., studies of Canadian land values reach many of the same conclusions. For more, see the “Re/Max Farm Report 2014.”

Jennifer Ifft
Assistant Professor and Mueller Family Sesquicentennial Faculty Fellow in Agribusiness and Farm Management
Cornell University

Farm operators do tend to be involved in their farm operations well beyond the average U.S. retirement age. With regards to my parents who farm in central Illinois, I often joke that they will only retire when they are physically unable to farm, only very grudgingly in that case.

That being said, currently there could be a very nice “window” for farmers who are at retirement age to consider selling farmland. Farmland prices over the past two decades on average have been very consistent with farm incomes/commodity prices and interest rates. Sustained low prices and increasing interest rates should eventually lead to a decline in farmland prices, although certainly to a degree that “non-agricultural influences” we discussed in our article will help sustain farmland prices.

Currently what we have is a stabilization or softening of farmland prices, and I have heard from different sources that there are farm operators (some with significant cash holdings from several high income years) and investors who would be interested in buying farmland if prices further decline, which could prevent substantial drops in prices, at least in the short term.

So in short, with farm prices still relatively high but the potential for a significant decline in the future, it could currently make sense for farmers at retirement age to sell farmland and I wouldn’t be surprised to see this happening at some level.

Todd Kuethe
Clinical Assistant Professor, Land Economics
Department of Agricultural and Consumer Economics
TIAA-CREF Center for Farmland Research
University of Illinois, Urbana-Champaign

First, I think that farmers, like any other segment of the labor source, definitely consider the costs and benefits of retirement, and as farm incomes are expected to decline, and in some cases experience negative returns, many farmers may decide that now is a nice time to retire. However, I think the broader impacts of the aging farm population are often overstated.

Drawing on some of the work Jenny and I did together when we were both still at USDA (“Farmland Tenure in the USA and in Illinois”), farmers, nationally, own about 56% of the acres that they farm.

So, a big piece of the puzzle is “who are the landlords renting to farmers?” The USDA survey we examined indicated that less than 10% of landlords are retired farmers. However, the overwhelming majority of landlords, 75.3%, can be described as “living within in a rural area in the same state.” So, the “typical” landlord is someone who lives in the area, but wasn’t the previous farmer of the land. See “Landlord Characteristics in the USA and in Illinois.”

Anecdotal evidence tells us that a lot of farmland is owned by the spouses and heirs of retired farmers (sometimes multiple generations removed from the retired farmer). I know this is the case with my family farmstead. It’s currently owned by my aunt and uncle, but neither of them were farmers. They’ve been renting it to a neighbor since the early 1980s.

If we look at the transfer declarations of farmland sales, it provides further support of this notion. About half of farmland that changes hands in Illinois is sold through related parties. That means in a typical year, about 1% of farmland in the state is available for sale on the open market. And I think the Illinois evidence is pretty representative of the Corn Belt and Midwest as a whole. See “Farmland Turnover in Illinois.”

Even considering land that changes hands through related parties, only about 2% to 2.5% of farmland changes hands in a given year. The sale of any individual parcel of land is a rare event, and farmland markets are notoriously “thin.”

Current tax laws make farmland a great way to transfer wealth across generations. Also, farmland has relatively low costs associated with depreciation and real estate taxes. Since farmland offers a fairly stable income through cash or share rental agreements, there is little incentive to sell farmland for those who inherit it. Most of the sales that we do see are ways of settling estates or trusts.

So, even if we see a lot of farmers decide to retire, on average, they have ownership stake of less than half of the acres they operate. Of the acres that they do own and operate, most would favor retaining ownership and renting to another operation or passing it on their heirs. Those heirs may decide to sell in the future, but I wouldn’t expect this process to play out rapidly.

I think that we may see an uptick in farmer retirement, but I doubt that this will translate into a significant portion of land hitting the open market. It’s likely that most of the land owned by these farmers will transition to rented acreage or be passed on to future generations within the family. I think the impact of farmer age is often overstated when it comes to the ownership structure of farmland markets.

<< Read the full story, “Taking Care: Craig Holm and his Minnesota Farm”