We are doing some work on farm and farmer value streams here at Regional Strategic, Ltd. The pilot work is using Iowa, but the intent is to take what is found and expand the work across the Upper Midwest.

One of the first major questions regards farmland valuation and appreciation. The graph below shows a simple relationship that leads to a number of complex questions. The graph shows cumulative inflation-adjusted value streams for ag land appreciation (from Iowa State University’s Farmland Value Survey), direct government payments (from the Bureau of Economic Analysis), and farm income net of government payments (derived from the Bureau of Economic Analysis) per acre of farmland (from the Census of Agriculture).

The period runs from 1993 to 2022. The scenario assumes that an acre of land is purchased in 1992 and the purchaser initiates production in 1993. The three lines show accumulations of income and land appreciation over a 30-year period. The endpoint is set as the last year in which complete stable information was available from the Bureau of Economic Analysis.

The first thing that jumps out is that accumulated land value appreciation outruns operating income and direct government payments. Accumulated land appreciation separates from the other two streams in 2002. In addition, Operating income breaks out above direct government payments in 2007.

Over the thirty years, the three inflation-adjusted value streams generated an average of $458 per year. Averages for each of the components were

Of this average value stream, only 38 percent came from income, and nearly a third of this income was in the form of direct government payments. Operating income accounted for only a little over 26 percent of the value stream generated by an average acre of Iowa agricultural land.

Average farm earnings net of government payments (operating income) was only sufficient to pay a 4.72 percent return on the 1992 purchase price of $2,559. Operating income plus direct government payments were only sufficient to pay 6.86 percent return to purchase price. This is all barely enough to cover interest or carrying cost on the investment.

Given these low production returns, what makes land price appreciation average 11.5 percent per year?

What caused land appreciation rates to break away from operating income and direct government payments in 2002?

What caused operating income to break away from direct government payments in 2007?

A portion of these relationships might simply be the result of the period being observed, but the size and consistency of the breaks suggest there is something more. There appears to be a confidence in the value of Iowa farmland that overrides observed farmland productivity. Why is that?

• Is it due to indirect subsidies?
• Is it due to the conviction that subsidies and relief will always maintain farm income?
• Is it because of a belief that the removal or reduction of farm subsidies, both direct and indirect, will inordinately affect other production areas and concentrate production and value in Iowa?

We honestly don’t know the answers to these questions. That is the point of the inquiry. More will come as we noodle this out.