If you read agricultural newsletters or magazines your may have seen some of the $10,000/acre plus land sales in the Midwest. Reports indicate some areas of the Midwest have seen greater than a 20% increase in land prices. The Mississippi Delta Region has seen increases in land prices over the past year but not as dramatic as the Midwest. I’ve seen several sales over $4,000/ac and a few above $5,000/ac in the Mississippi Delta Region. So you may ask what is currently driving land prices higher and who is buying in the Mississippi Delta Region?
The four main factors driving current land prices in the Mississippi Delta Region are limited supplies of quality land, low interest rates, high net farm income, and limited alternative investments.
1) The supply of quality farmland is limited. Limited supplies and high demand cause prices to increase. If higher land prices attract more sellers, the price of land could start to decrease or stagnant as supply moves back to equilibrium with demand.
2) Interest rates are at all time lows. Low interest rates reduce the discount on expected income from the land. In addition, low interest rates usually lower the value of the dollar which in return increases exports, commodity prices, and farm revenue.
3) Higher farm revenue has on average increased net farm income. Many operators have been very profitable from higher commodity prices and gains in efficiency. With cash available many operators are looking to expand their land base. Some are willing to pay higher prices and income average newly acquired land across their land holdings.
4) The lack of alternative investments is driving land prices. In economics this is called opportunity cost. With instability in other real estate sectors and the maco-economy in general, investors are eyeing farmland as a less risky, stable, and higher returning investment. The general economy is very unstable and high risk for many investors. Agriculture is the bright spot in our economy and many investors with little or no experience in agriculture are now interested in purchasing farmland due to limited alternative investments.
Throughout the Mississippi Delta Region both operators and investors are purchasing land. It appears land transactions can be categorized both by acreage and location. The majority of transactions below one section (640 ac) appear to be primarily by operators while larger acreage is being purchased by investors. In addition, the majority of transactions in the Northern Mississippi Delta Region are by operators while investors are purchasing more land in the Southern Mississippi Delta Region.
Land prices in the Mississippi Delta Region have increased and have potential to increase further unless the drivers of current land prices change. For example if the market is flooded with farmland for sale, this will cause prices to go down. If interest rates increase, land prices will decrease. If net farm income decreases, land prices will decrease. If the general economy improves, alternative investments will increase and decrease the attractiveness of farmland. Many other factors can impact land prices both positively and negatively, but current land prices are primarily being driven by limited supplies of quality land, low interest rates, high net farm income, and limited alternative investments.