In agricultural economics, we typically think of the value of farmland as representing the discounted stream of net income (or profit) that accrues to the landowner. This is sometimes referred to as the “fundamental market value of farmland.” Future net income is discounted because money earned in the future is worth less than the same amount earned today. The further into the future the income is earned, the more it is discounted. If we earned the income today, we could make an investment and reap some positive return from it. This hypothetical positive return represents the discount rate – i.e., what we give up in exchange for earning income later rather than sooner.
Importantly, the source of the income capitalized into the value of farmland can change when we think about the future profit from owning land. Because the income a landowner would receive from converting the land to a developed use (e.g., housing) is typically much higher than the income that could be earned from farming, discounting explains why land located close to cities commands a much higher price than comparable land with the same productivity located further away. Specifically, because development is generally viewed as being more imminent for lands close to cities, the future income from that potential future land-use change is discounted less steeply, which raises the land’s value.
A natural measure of the net income from farming is annual profit from producing and selling agricultural commodities. Profit, however, is hard to measure directly and is not well captured in any regularly updated data sources. As an alternative to profit, cash rent, the price a landowner charges to a tenant who farms the land, is often used to approximate the net income that a farmland owner would expect to receive in a given year. I’ve noted in previous posts how inflation-adjusted cash rents in Oregon have remained flat over the past 15 years or so.
In contrast, land values have mostly trended upward. The figure below shows the average per-acre price of irrigated and non-irrigated cropland in Oregon over the period 1999-2024 as a three-year moving average. (See the note at the end of the post for how I’m classifying land as irrigated or non-irrigated.) Irrigated land prices have more than doubled, from under $6,000 to almost $12,000 over the past 25 years, but the trend has flattened since 2022. Non-irrigated prices show more volatility, but despite a drop in recent years current prices are still up by about $2,000 (50%) over the 1999 three-year average. Both trends are generally in line with the annual land value estimates from USDA surveys. It is worth noting, however, that the sample size for non-irrigated cropland sales (1,956) is a lot smaller than that for irrigated cropland (8,467).
The profitability of a farmland investment is commonly measured using the rent-to-value ratio, which is just the rent divided by the land price (multiplied by 100). This is also referred to as the capitalization rate (or cap rate). It can be thought of as the rate of return to someone who buys and rents out farmland. The figure below shows the three-year rolling average cap rates for irrigated and non-irrigated farmland in Oregon for 1999-2024. Since the 2007-09 recession, both cap rates show a general decline, in line with what has been observed other regions of the US (see here and here).
Along with the cap rates, I’m also plotting the market yield on 10-year U.S. Treasury notes. These are typically considered a benchmark investment asset, representing a safe (or risk-free) way to earn interest income. Treasury yields are also used as the basis for mortgage rates, including farm mortgages. From a farmland investment perspective, the Treasury yield can be thought of as the return on a competing, safe interest-bearing investment.
Overall, the trend non-irrigated cap rates appear to be more closely linked with Treasury rates. Because the non-irrigated cap rate lies below the Treasury yield for most of this period, it suggests the net income from farming alone (measured by cash rent) is not sufficient to justify the current prices of non-irrigated land. Another interpretation is that additional sources of land-related profit, or expectations of changes in future profit, would be needed to make purchasing non-irrigated cropland worthwhile. The low cap rate may also explain the relatively small number of non-irrigated cropland sales over this period, which itself suggests the non-irrigated cropland trends presented here should be taken with a grain of salt.
Up until the last couple of years, the downward trend in irrigated cap rates tracked fairly well with Treasury yields from 2012-2019. The fact that the irrigated cap rate lies above the treasury yield for most of the past 15 years indicates that the net farm income from irrigated crop production generally justifies its relatively high price. That’s not to say that current farm profitability is the only factor driving the demand for irrigated cropland, just that it alone is sufficient to justify its current price.
Of course, the analysis presented here should not be interpreted as investment advice, but rather as a general overview of how well trends in Oregon’s cropland prices reflect farm profitability. Given how diverse Oregon’s farm sector is, an important caveat is that the profitability of investing in farmland is likely going to vary considerably across the state, which I’ll leave for a future post. Additionally, Oregon’s farmland rental market is less fluid than those in other states (e.g., in the Midwest), which potentially makes cash rent a less reliable approximation of farm profit.
In terms of how cropland cap rates might change in the future, rents have been fairly stable across the board over the past 15 years. One thing that might change this is trade policy, which could affect commodity prices, and, in turn, farm profits and rents. Producers were at least partly compensated for the losses they suffered during the last trade war with China, so it is hard to say what will happen as things continue to escalate in the current round of tit-for-tat tariffs.
For farmland prices, the broad macroeconomic factor to keep in mind will be further changes in the Federal Reserve’s benchmark interest rate. Because higher interest rates cause future income to be discounted more steeply, farmland prices tend to have an inverse relationship with interest rates. The federal funds rate has gone up in recent years and although this seems to have cooled Oregon’s farmland market somewhat, it is worth keeping in mind that changes to the Fed’s benchmark rate can take a decade or more to be fully reflected in farmland values.
Notes: Farmland price data come from a database of agricultural property transactions I developed using CoreLogic’s proprietary nationwide property transactions database. The 1997-2024 agricultural property sales used in this analysis are: (1) exclusively made up of agricultural parcels (per CoreLogic’s land use codes), (2) between 10 and 2,000 total acres in size, (3) priced between $100 and $75,000/acre, (4) outside urban growth boundaries, (5) have at least 25% of the parcel area zoned exclusive farm use, farm-forest, marginal farmland, or non-public, and (6) have at least 25% of the sold area in crop production between 2009-2023 per USDA’s Cropland Data Layer.
Irrigated cropland is defined as land satisfying the above criteria and also having (1) 50% of the sold area covered by a primary irrigation water right per the Oregon Water Resources Department (OWRD) or (2) 50% of the sold area irrigated between 1997 and 2020 according to an updated version of the LANID data developed by Xie and Lark (2021). The latter is used because OWRD does not comprehensively account for water rights attached to land in irrigation districts. Non-irrigated cropland has no more than 10% of the sold area in both of these two categories.