If you were lucky enough to own, buy or inherit a sizeable patch of pastureland three years or so ago, chances are some landowners are sitting on gains that would outstrip nearly a decade's worth of running cattle on the land.

Low historic interest rates, record cattle profits, speculation, and demand from urban consumers combined to drive pastureland values up an average 20.3% nationally during the three years through December 2004. Ranchland owners in 11 states — Arizona, Colorado, Florida, Iowa, Maryland, Michigan, Minnesota, South Dakota, Virginia and Utah — have seen gains during that period of more than 30%.

Indeed, despite all the attention-grabbing headlines about soaring home prices, the run up in the agricultural land market is even more dramatic. In 2004 — the most recent year for which data is available — pastureland values rose at a faster clip than median home prices in 33 states. Colorado is at the top of that list, where pasture values climbed 18.1% — more than four times the 4.2% pace of home prices in the state.

USDA won't report calendar year 2005 pastureland values until August 2006. But recent surveys by Federal Reserve banks suggest non-farmer buyers are helping to push pasture values up by increases of 10%-plus in many states.

For the 12 months through September 2005, lenders polled by the Federal Reserve estimate that pasture values rose 10.3% across the western states of Arizona, California, Idaho, Nevada, Oregon, Utah and Washington; and 18.2% across southern New Mexico, Texas and northern Louisiana. Smaller surveys by the Richmond and San Francisco Fed districts report pasture values rose 29.5% and 10.3%, respectively, in those regions (See chart on page 14).

Market dynamics

While the pace of price increases appears to be easing in some heated regions of the country, appraisers and ranchers agree that buyer demand and price levels remain mostly strong. Moreover, in many regions, especially those within commuting distance to cities, pasture tracts are generally priced beyond their agricultural-use value.

To understand the dynamics driving the ranchland market, we look to Texas — whose 5.4 million beef cows rank it as the biggest pasture market. That's more than double the number of cows in No. 2-ranked Missouri. Many market trends originate in Texas and gradually migrate to other regions.

For ranchland east of the I-35 corridor — which stretches from Oklahoma City to Laredo, TX — generally 10% or less of the market value relates to the land's agricultural value.

“The rest of the value is because buyers are after it for investment purposes or recreational use,” says Richard Conner, a Texas A&M University professor of rangeland management. Conner says he's seen central Texas ranchland move from $1,500-$1,700/acre in November 2004, to $2,200-$2,700/acre in November 2005 — an average 53% gain.

“If I had pasture land I was thinking of selling, now would be the time to do it. I don't see how it can maintain at these prices,” says Don Keeling. He's a Pleasanton, TX, stocker operator who manages more than 6,000 cows and yearlings on some 350,000 acres in South Texas, the Trans Pecos region, and Coahuila state in northern Mexico.

Who are the buyers? Doctors, lawyers and retired people who want to move out of the city, Conner says.

What's more, this transfer of rural land from ranching families to urban buyers is dividing up larger Texas ranches and reducing the supply of pasture because new owners are less inclined to run livestock on the property.

“It's happening all over Texas,” Conner says, and it's taking a “material” amount of land out of production.

Northern exposures faring well, too

Though non-farmer buyers are active in most markets across the country, they are more apt to continue running livestock on the tracts they purchase, especially in northern pasture regions.

Pasture values in North Dakota were up nearly 16% to $227/acre for the year ended in September, according to the Federal Reserve. And while buyers are often a mix of livestock operators seeking to expand and outside investors, most land stays in production, says Elroy Haadem, a Burleigh County Extension agent north of Bismarck.

The Montana market similarly is dominated by out-of-state recreation-oriented buyers. But most tracts continue as beef ranching operations, even among absentee owners, says George Luther, an appraiser in Miles City. He estimates area ranchland is appreciating at an 8-14% annual rate.

But many market participants also echo Keeling's worries about whether the bull market in pastureland is nearing the end of its run. Though pasture values generally haven't reached their mid-1980s peak, the prospects for continued near-term gains are less certain.

“There are a lot of big variables with interest rates, the farm economy and weather,” notes Richard Sullivan, a Farm Credit Services of Missouri appraiser in Springfield. “Interest rates are inching up and drought conditions are continuing from the southwest corner of the state to the northeast corner. These are not favorable, and are likely to play on the minds of most people thinking of making an expansion,” he adds.

While the Federal Reserve reports that western Missouri pasture values rose 19% for the year through September, participants in a July University of Missouri survey predicted the market would cool over the next year and post a 4.3% gain.

“A lot of people think land prices will keep going up,” Sullivan says. “Anyone who has a longtime background in agriculture knows that's not the case — it just takes longer to get to the peaks and valleys. Just like the stock market and the dot.com bubble, the farmland market could rupture at some point.”

Indeed, some observers fret that non-farmer investors who shifted money from the stock market and money market funds into farmland will eventually look to cash in their gains and reinvest in stocks — which are beginning to show renewed vigor, the Dow rising above 11,000 in January before settling back.

“People with money look at what will offer them the most favorable return,” Sullivan says. “As the stock market comes back, that money could be pulled out.”

2005 Pasture Land Values Summary
Region/State Value/acre ($) 12-month gain (%) 3-year gain (%) 5-year gain (%)
Northeast: 2,770 12.1 32.5 30.7
Connecticut
Delaware
Maine
Maryland 7,300 32.7 108.6 114.7
Massachusetts
New Hampshire
New Jersey 11,300 6.6 16.5 27
New York 825 6.5 21.3 47.3
Pennsylvania 2,200 10 22.2 14.6
Rhode Island
Vermont
Lake states: 1,200 14.3 35 82.1
Michigan 1,950 8.3 34.5 80.6
Minnesota 810 15.7 40.9 84.1
Wisconsin 1,400 16.7 33.3 84.2
Corn Belt 1,330 10.8 26.7 37.8
Illinois 1,240 11.7 20.4 14.6
Indiana 1,900 6.7 21.8 23.4
Iowa 1,000 13.6 31.6 42.9
Missouri 1,260 11.5 28.6 46.5
Ohio 2,240 6.7 20.4 40
Northern Plains: 325 16.5 30.5 40.7
Kansas 500 16.3 25 33.3
Nebraska 310 12.7 26.5 34.8
North Dakota 210 13.5 27.3 35.5
South Dakota 290 20.8 38.1 52.6
Appalachian: 2,500 13.6 30.9 38.1
Kentucky 1,700 11.1 18.1 21.4
North Carolina 3,430 7.2 21.2 42.9
Tennessee 2,620 6.9 16.4 17
Virginia 3,500 25 66.7 70.7
West Virginia 1,380 7.8 23.2 53.3
Southeast: 2,400 11.6 28.3 50
Alabama 1,550 9.2 19.2 19.2
Florida 2,600 15.6 33.3 65.6
Georgia 3,150 6.8 26 46.5
South Carolina 2,150 7.5 22.9 48.3
Delta states: 1,510 16.2 29.1 46.6
Arkansas 1,570 20.8 26.5 57
Louisiana 1,500 11.1 18.1 30.4
Mississippi 1,420 11.8 25.7 42
Southern Plains: 695 11.4 21.7 28
Oklahoma 550 15.8 26.4 32.5
Texas 725 10.7 20.8 27.2
Mountain: 346 14.6 26.7 37.8
Arizona1 600 20 33.3 66.7
Colorado 555 18.1 35.4 54.2
Idaho 805 11 15 15
Montana 320 12.3 25.5 39.1
Nevada1 295 13.5 18 9.3
New Mexico1 195 14.7 25.8 30
Utah1 630 21.2 32.6 50
Wyoming 270 14.9 28.6 63.6
Pacific: 1,120 9.8 24.3 60.5
California 1,750 9.4 25 75
Oregon 510 8.5 15.9 25.9
Washington 585 8.3 14.7 19.4
National average2 694 9.5 20.3 32.4
Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value estimates are as of January 1st for each calendar year. 1Excludes American Indian Reservation Land. 2Excludes Alaska and Hawaii. Source: USDA