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Illinois
AgriNews - May 2004
 
What’s Keeping Illinois Farmland Markets so Strong?
Bruce J. Sherrick
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign
According to USDA, the average appreciation
for farmland in Illinois was 5% in
2003. The Chicago Federal Reserve in its AgLetter survey
of agricultural bankers reports
a district-wide increase of 7% in the value of good
farmland, with upper 2/3 of Illinois
experiencing 8% to 13% increases in values. The Illinois
Society of Professional Farm
Managers and Rural Appraisers (ISPFMRA) conducts an
annual state-wide survey, and
likewise found strong rates of appreciation, with average
appreciation approaching 15%
in counties in the “northern corridor” of
Illinois and generally strong increases throughout
the state.
What factors are contributing most to strong farmland
values? While traditional
explanations of farmland values focus on farm income
as a primary determinant of
farmland values, it is increasingly important to account
for factors unrelated to the value
of farm production.
In a recent study at the University of Illinois, sales
data from the Illinois Dept. of
Revenue were examined to identify factors associated
with differences in farmland prices
through time and across locations. Sales from over 64,000
farms covering 4.2 million
acres were examined to identify influences of soil productivity,
size, location,
“ruralness”, population density, non-farm
income, distance to cities over 50,000 in
population, and livestock production intensity and scale.
Not surprisingly, the results show that soil productivity
and land improvements
contribute significantly to the farmland value. Further,
increasing parcel size has a small
negative effect. But these factors do not change much
over time, and other sources of
income (e.g., government payments) have not increased
enough to explain the remaining
value increases.
So what other factors help to understand farmland values?
Interestingly, distance
to large cities is highly significant – even for
counties well beyond the northern corridor.
Further, the ruralness of a county (measured by USDA
“Beale-code”), has a negative
impact on farmland values, but not on farm income. Population
density has an effect that
can be translated as a 10% increase in population increases
farmland value by about
7.9%. Non-farm per capital income has a slightly less
pronounced effect. Swine
production has a more complicated relationship. The
study finds that the more swine in a
region, the lower valued the farmland, although directional
causality is not established.
However, more concentrated production (more animals
per production unit) is associated
with higher values. Thus, for a given total production,
land values are highest under
concentrated rather than dispersed production systems.
Perhaps even more important is the influence of so-called
1031 or tax-deferred
exchanges. In the ISPMRA survey, 45% of purchases were
reportedly motivated by
1031 considerations (as high as 60% of buyers in Chicagoland
collar counties where over
30,000 new building permits have recently been issued
per year). The ability to “trade
out” and avoid capital gains taxes translates to
higher willingness to pay. In light of the
thin market for farmland, the significance of this effect
may be difficult to overstate.
Relatively low interest rates, and recently high farm
incomes further augment the demand
by traditional buyers. Finally, the low correlation
in farm returns to other financial
investments, and attractiveness of real estate as an
inflation hedge, also contribute to the
continuing strong demand for farmland.
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