Agricultural land values increase


Issue Date: May 2, 2007
Kate Campbell

Farm and ranch land appraisers point to a moderating "Goldilocks economy"—not too hot and not too cold—for slower, more solid appreciation in California agricultural land values. Based on property sales in 2006 and the outlook for 2007, experts say most agricultural property values have inched upward, seesawing with economic shifts.

Generally the past couple of years have offered fairly positive news for agricultural commodities and that has translated into steadily increasing land values, said Mark Clarke, Rabo Agrifinance lending affiliate. But that has not necessarily translated into ever-increasing income.

"Land values in 2005 were undergoing dramatic changes and the same thing was true last year, but this year those changes in value are moving at a slower pace," Clarke told those attending the annual agriculture real estate trends conference last week in Sacramento. The event was sponsored by the California Chapter of the American Society of Farm Managers and Rural Appraisers. (See related story on Page 9.)

While there were many national and international influences on the state's agricultural land values—for example, a weak U.S. dollar assisting export efforts and historically low interest rates—he said there also were many impacts specific to areas and regions in the state.

California is the world's sixth largest economy, according to the California Legislative Analyst's Office, with more than $1.5 trillion in output and a thriving $32 billion agricultural sector. Analysts say the state's economic performance mirrors the U.S. economy in many ways.

Gov. Schwarzenegger's proposed 2007-08 budget recognizes this economic interconnection and notes a slowing U.S. economy, as well as a racheting down of the state's economic prospects in the next fiscal year.

But there are spots in California's agricultural real estate market that defy economic logic and trends. Sales of Napa County vineyard properties for 2006 continued to astonish, with increased prices being paid by successful wineries and individuals entering the sector.

Strong demand in prime areas of Napa County pushed vineyard values to more than $250,000 an acre, according to the society's highly anticipated "Trends in Agricultural Land and Lease Values" report. Small vineyard prices are heavily influenced by the availability of home sites, the report shows, last year adding as much as $3.5 million to the price tag for small production parcels—and experts say demand for these properties is unabated.

In Sonoma County, where per-acre prices for vineyards on resistant rootstock sold for between $65,000 and $85,000, a good home site can contribute an additional $2.5 million to the sales price. In Lake County, vineyards on resistant rootstock were selling for between $24,000 and $35,000 an acre and in Mendocino County winegrape vineyards were selling for between $28,000 and $55,000 an acre.

In contrast, real estate experts report that winegrape vineyard sales in Stanislaus County ranged from $10,000 to $15,000 an acre. In San Joaquin County the range was $13,000 to $18,000, while in Fresno County they were about $6,750 to $11,250.

With the exception of the Napa Valley, winegrape vineyard prices have remained relatively constant after a dip in 2002-03. Raisin vineyard prices also have stabilized and have started to increase, selling in Fresno County in 2006 for between $6,500 and $12,000 an acre. That compares to a low in 2003 of $3,500 to $6,000.

The experts suggest that although agricultural land values are strengthening, prices are just beginning to appreciate above levels seen several years ago. This may be part of the explanation for the boom in 1031 real estate exchanges from other classes of commercial property into agricultural real estate. Farm and ranch property may appear to investors as an undervalued asset type. That perception may have agricultural land acting as a capital sponge, offering upside potential and tax benefits.

Mike Iliff, an appraiser with Fresno Madera Farm Credit, said the investment shift into agricultural real estate is reshaping the farm and ranch market in California. A 1031 tax-deferred property exchange allows investors to defer capital gains tax if proceeds from investment property are reinvested in "like" property within 180 days. The tax savings can total 24 percent and tax on gains is deferred indefinitely.

"It's amazing how many times we're seeing an agricultural transaction started with an exchange of property," Iliff said.

Real estate agents specializing in agricultural properties are reporting that between 20 percent and 75 percent of transactions last year involved 1031 exchanges, compared to 10 percent to 30 percent five years ago.

They say reasons for the increase include a looser IRS definition of "like kind" of investment property, relatively lower prices for agricultural properties, opportunities for dividing in the future, estate planning strategies, portfolio diversification and the ability to buy more and pay more because of the 1031 tax advantage.

Iliff said in his report on trends in agricultural land values that there is "no question that 1031 tax deferred exchanges have altered the agricultural real estate market over the past several years. Exchangers have increased values, caused an increase in the number of transactions and allowed investors to stay within the agricultural market."

For irrigated cropland, prices vary widely by commodity and geographic location. Irrigated vegetable crop in the northern intermountain valleys in Lassen, Modoc, Shasta and Siskiyou counties fetched between $1,750 and $5,000 an acre in 2006. Row crop ground in Monterey County sold for between $12,000 and $50,000 an acre, while in Madera County irrigated cropland in the Madera Irrigation District sold for between $5,000 and $8,000 an acre.

In the San Joaquin Valley, per-acre prices for irrigated cropland varied greatly depending on water district and exchange contractor. In the Imperial Valley, which is home to the nation's largest irrigation district, ground adaptable to growing vegetables sold for $6,000 to $12,000 an acre.

In the Sacramento Valley, the experts said prices for rice production continue strong with limited acreage for sale and those properties with waterfowl hunting potential commanding a premium. In 2006, rice ground sold for between $2,500 and $6,000 an acre, compared with $1,500 and $4,000 in 2000.

Prune orchards have rebounded in price, selling on average in 2006 for between $4,000 and $9,000 an acre. That's up from a low in 2004 of $2,000 and $7,000. Likewise peach orchards are seeing improved value. In 2000, peach property fell sharply to about $2,000 an acre, but in 2006 reported sales prices were between $5,000 and $12,000 an acre.

In Tulare County, real estate specialists report that there was continued demand for cropland for both field production and permanent planting. Dairy operators continue to buy near or adjacent land as buffers for waste mitigation and feed crop production. Buying by dairy producers slowed at the end of 2006 because of falling milk prices and marginal income.

The experts say, however, that land in the Tulare dairy shed continues to be under pressure from developers looking to build subdivisions. A drastic slowdown in the residential building sector in 2007 may ease economic pressure on dairy land at a time when dairy income is strengthening.

The farm and ranch real estate appraisers said they have been out in the state's fields and orchards and it looks like a good year for most tree and nut crops—outstanding chill hours due to freezing winter temperatures, a clearing out of the winegrape glut, which will improve farmgate values, and strong prices for feed and grain crops.

"In general, demand for agricultural land and property continues to increase while supply is stagnant," Iliff said. "Values, however, will continue to outpace the land's ability to produce income and the link between income and value will continue to be stretched ever thinner."

Copies of the report "Trends in Agricultural Land and Lease Values" cost $15, plus postage and handling. To order or for more information online, go to www.calasfmra.com or call (209) 368-3672.

(Kate Campbell is a reporter for Ag Alert. She may be contacted at kcampbell@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.