Take a growing population and add more disposable income and personal wealth than at any time in history. Then throw in low interest rates mixed with anemic Wall Street performance.

The result is an explosive mixture, capable of propelling agricultural land prices beyond their intrinsic production value. And fast.

“Since 2001, it's been phenomenal,” says Charles Gilliland, a research economist with the Texas Real Estate Center at Texas A&M University.

The median nominal price of agricultural land in Texas jetted ahead another 13% during the first three quarters of 2005 alone. Since 2002, the median price for agricultural land in the state has jumped 47.8%. Gilliland says there's nothing to suggest this type of price acceleration will lose steam any time soon.

Land values across U.S.

To a greater or lesser degree, the same thing is playing out across the nation. According to USDA's “Land Values and Cash Rents 2005 Summary,” farmland real estate values — a measurement of all land and buildings on farms — averaged $1,501/acre when 2005 began. That's 11% more than the previous year, the largest year-to-year increase since 1981.

Closer to home, pasture values rose 9.5% to an average of $694/acre, according to the same report. That price is 24.5% higher than five years ago. The Northern Plains (Table 1) posted the largest annual increase in pasture value at 16.5%, followed by states in the Delta region at 16.2%.

As anyone searching for grass can attest, cash rents for pasture are increasing too, though at a slower pace. The same USDA report pegs average rent at $10.30/acre, which is 7.3% higher than a year earlier. However, in parts of the country most densely populated by cattle, pasture rent is considerably higher than the average (Table 2 on page 20).

Table 1. Average pasture value/acre — 2005
Average per acre Change from 2004
Northeast region (MD, NJ, NY, PA) $2,770 +12.1%
Lake states (MI, MN, WI) $1,200 +14.3%
Corn Belt (IL, IN, IA, MO, OH) $1,330 +10.8%
Northern Plains (KS, NE, ND, SD) $325 +16.5%
Appalachian (KY, NC, TN, VA, WV) $2,500 +13.6%
Southeast (AL, FL, GA, SC) $2,400 +11.6%
Delta states (AR, LA, MS) $1,510 +16.2%
Southern Plains (OK, TX) $695 +11.4%
Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) $346 +14.6%
Pacific (CA, OR, WA) $1,120 +9.8%
U.S. (Lower 48 states) $694 +9.5%
Source: USDA Land Values and Cash Rents 2005 Summary

A seller's market

Using Texas as a snapshot of the American collage, Gilliland explains much of the land is trading to folks who have no intention of using it for agricultural production. In a 2005 survey of agricultural land appraisers (a few brokers and land owners), only 13% said agricultural production was important to buyers of this land.

That figure lags water rights as a buying motive by 1%, and is only ahead of mineral rights and second-home acquisition (both 9%). Conversely, 75% of respondents said hunting and fishing were important buyer motives, followed by 52% that cited other recreational purposes.

The heady prices being paid for agricultural land underscore buyer motives. As Gilliland explains, “In most of the state, you're talking about miniscule returns on pasture land if you don't include the value of hunting leases.” For instance, if you only counted cattle returns on pasture in the Texas Hill Country near Kerrville today, he says you'd be talking a return of less than ¼ of 1%. And this is at a time when cattle returns and profit potential are the highest in history.

“The health of rural land values is a lot more closely linked to the overall Texas economy than to the agricultural economy,” Gilliland says. He explains the opposite was true in his state until about 1966. Then, for the first time, the price producers were willing to pay for land dropped below a measure of what non-agricultural buyers were willing to spend. Except for a brief period in the early 1990s, that reality has held and is being magnified.

Between 1969 and 2004, the value of Texas agricultural land moved in the same direction as personal income 79% of the time. From 1993 to 2004, value followed personal income 95.9% of the time. As personal income increases, so does the non-agricultural value of rural land.

Farmers and ranchers obviously are still buying some of the land, but they have to compete with buyers willing to subsidize interest and lifestyles, rather than make the land pay for itself.

More money, higher prices

There's plenty of money floating around, too. Average disposable income in Texas rose 32.8% from 1995 to 2005. Agricultural land values since that time more than doubled, increasing by 145.6%! A passel of land transactions in that state — with an average parcel size of just more than 100 acres — are all-cash deals, too; no financing.

Table 2. Average pasture cash rent/acre
Average per acre Change from 2004
Northeast region (PA) $24.00 0
Lake states (MN, WI) $26.90 +9.8%
Corn Belt (IL, IA, MO) $29.00 +5.2%
Northern Plains (KS, NE, ND, SD) $12.00 +1.7%
Appalachian (NC, TN, VA) $21.00 +9.9%
Southeast (AL, FL, GA) $19.00 -0.5%
Delta states (LA, MS) $17.00 +2.4%
Southern Plains (OK, TX) $8.40 +3.6%
Mountain (CO, MT, NM, UT, WY) $3.80 +5.5%
Pacific (CA) $13.50 0
U.S. (Lower 48 states) $10.30 +7.3%
Source: USDA Land Values and Cash Rents 2005 Summary

Nationally, a similar picture emerges. Since 1995, average per capita disposable income has grown 45% in real dollars. Agricultural land values have climbed 79% during the same period.

Along with personal income, population growth also is related to escalating prices. During the decade described above, the Texas population increased 21.9%, to 21.8 million. The U.S. population grew by 12.8%, to 296.4 million. That means more people with lots more jingle in their pockets.

Likewise, age of the population plays a role. It's not just a larger percentage of the population acquiring more wealth as they near the end of careers, it's also the wealth the population acquires from the generation before it.

It has to slow down, doesn't it? Not necessarily.

The leading edge of the Baby Boom Generation is now hitting retirement age. As their parents begin transferring estates to them, it's easy to believe there will be even more disposable income as time goes on.

Estimates of the amount of wealth that will be transferred from parents to Baby Boomers vary widely. One estimate by Boston College researchers pegs the sum at $41 trillion between 1998 and 2052.

Even without the impending transfer of generational wealth, though, land prices tend to remain above price plateaus achieved in the past, rather than fall through the floor.

New pricing floor?

“In 1986, when the recession hit (the energy recession in Texas) and the stock market was doing fairly well, investors weren't interested in the land. Plus, no one else had the money to buy land for recreation,” Gilliland says.

Nominal land prices in Texas declined until 1992, but never below the level of about $500/acre achieved in the late '70s.

Once prosperity returned and multiplied, Gilliland says buyers of agricultural land for recreation dove into the market, and have driven it since 1992. Lackluster performance in the stock market also has driven more investor money into the fray. Bottom line: Prices have risen steeply ever since.

In fact, the sustained period of accelerated price increase has Gilliland wondering if there's been a fundamental shift in the dynamics that will keep an even higher floor under land prices.

“Is it a deviation that will slow down and get back to historical trends? Or is there some overall change in the marketplace structure ratcheting up prices? Only history will answer it,” Gilliland says. “But every passing year makes it look like something fundamental has changed.”

Making more land

One thing that hasn't changed is the fact that land use changes over time, in and out of agricultural production. Based on National Resources Inventory, the Economic Research Service says 49.4 million acres of land used for agricultural production shifted to non-agricultural use between 1982 and 1997. Of those acres, 46% were converted into forest use, and 28% to urban use. During that same period, 15.1 million acres of non-agricultural land were shifted into agricultural use.

Over time, the amount of land used for crops remains fairly stable, around 442 million acres. That accounted for 20% of the 2.3 billion U.S. acres in the 2002 Agriculture Census. Grass pasture and range accounted for 26%; urban land accounts for only 3%.

“Land use responds to economic signals. If farm returns are good, land is converted to farm use and vise versa, and not necessarily permanently. If you aren't rewarded, it goes back the other way. It's not a frictionless process, but you can convert land from one use to another,” Gilliland says.