Farm subsidies prop up Midwest land values

Farmland prices are rising to levels not seen for 20 years in the United States.

Never mind that crop prices have fallen precipitously. Or that the last time land values were this high, American agriculture hit its worst slump since the Great Depression. This time, economists say crop land prices could soar even higher.

The reason: government subsidies are propping up real estate values.

This distortion helps farmers who own all or most of their land. But it makes it tougher for young farmers and others who rent most of theirs. And it's proving a taxpayer-supported windfall for nonfarmers who own agricultural real estate.

Current farm subsidies expire this fall unless Congress crafts a new one.

"If you assume that government subsidies will continue at the same rate for a long period, there's nothing wrong," says Sergio Lence, an agricultural economist at Iowa State University in Ames. "If you think that farm subsidies for some reason will be cut drastically, clearly these prices could not be sustained for a long time."

The rise in land prices looks particularly startling here in the Midwest.

For example: an acre of Iowa farmland averaged $1,926 this past year, the highest level since the all-time record of $2,147 in 1981, according to an Iowa State University survey. South Dakota set a new record.

Such rising values look out of whack while crop prices are falling. In Illinois, the average agricultural acre costs 18 percent more than it did in 1981 even though the price of its major crops, corn and soybeans, fell by a third.

True, farmers produce more bushels per acre, which cushions the blow of low crop prices somewhat. And if real estate prices were adjusted for inflation, today's farmland prices would not look so high compared to 1981. By the same token, the inflation-adjusted fall in crop prices would look even worse. And the bottom line remains the same: only in agriculture are investors willing to pay more and more for an asset that returns less.

"If you look at commodity prices, you say this is ridiculous," says George Schwab, senior vice president of UBS AgriVest LLC, a land management company based in Hartford, Conn. "Then you look at farmers' net income and a large percentage of their income comes from government supports."

This fall, the US Department of Agriculture (USDA) released a report confirming what experts have long believed. Federal supports for eight major crops have pushed land prices above their natural levels. In a broad swath of the central US, where the bulk of these government-supported crops are grown, federal programs have boosted land values by at least a fifth. Here in the midwestern grain belt, stretching from eastern Nebraska to central Ohio, they've pushed up real estate by nearly a quarter.

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