What’s driving equipment and land costs?

Low interest rates and good commodity prices are often tied to increases in land and equipment values. While significant, however, they are not the only factors at play. 

Systems providing financial securities to different parts of the agriculture sector can have similar impacts on high crop prices. Asset interest from outside the industry, consumer whims, and other less prominent factors play a role as well. 

Why it matters: High machinery and land costs are significant barriers for those trying to break into farming, or trying to expand their farm business with limited leverageable assets. 

The inequality conundrum

After years spent considering the high land and machinery costs, the general issue for Al Mussell, research lead for Agri-Food Economic Systems, appears to be one of inequality formed from decisions made many years prior. 

More specifically, and with particular regard to machinery in the current era, he sees an implicit bias toward scale in new technology. 

“Machinery is a constant problem. It’s constantly expensive. Prices started rising even before 2008,” says Mussell, referring to his experience studying the issue as well as working with colleagues on-farm. 

“It’s like we’re just all going to adopt all this stuff…that’s not how it’s going to be. For someone to really adopt and use autosteer and a headland management system probably depends on decisions made 15 years ago. The capital investment decision which got the big operators to where they are today was likely made decades before.”

The bias toward scale seems to itself support higher equipment prices, which perpetuates the issue in turn as those up-to-date with existing technology can more easily leverage it for the newest equipment technology. This invariably pushes prices higher in the used machinery market as well, making it even more difficult for those with more dated machinery to access new technology and the efficiencies they bring. 

A similar problem can be applied to the land question. As prices go higher, those with a larger land base are better positioned to take advantage of land sales, or pay higher rental rates. 

“The reason for it is distributional. I find that, generally speaking and in any sector, there tends to be a handful of large operators that run the local land market,” Mussell says. “They have the land to leverage to buy the 100 acres that comes up for sale. It’s a different structure now as opposed to what we had in the early 1980s. 

“The related issue to these questions is inequality. The best way to get into farming appears to be already be in farming, to some extent.”

Sector structure

While land and machinery costs can be driven higher as producers in some sectors take advantage of high commodity prices, financial guarantees or safety nets can also contribute to higher land and equipment values. The consistent and good returns received by producers in supply-managed sectors, for example, can put substantial pressure on land markets if more heavily diverted to land assets. 

In supply-managed sectors, says Mussell, operating earnings are often more than 30 per cent of sales, which is exceptionally good. The catch is that ratio needs to be applied against exceptionally high capital investment levels, meaning returns from investments can be quite tight despite healthy operating earnings. 

“I think one of the reasons we have quota exchanges is to attempt to corral the benefits arising from strong operating earnings within the supply-managed sectors, and not to have it spread far and wide. That’s when you start to create some real inequities across commodities,” he says, while also referencing other more capital-intensive agricultural sectors. 

“In non supply-managed systems operating returns are notoriously variable, but they don’t have the same capital investment base to apply that against. That’s what I think sort of defines an equilibrium across commodity sectors. There are a lot of economic forces that pressure inequities. It’s nobody’s fault, really.”

Prices hot and cold

At a macro-level, both internal and external forces combine to create expensive land markets — as well as occasional dips. 

Patrick Westhoff, a director and professor with the University of Missouri’s Food and Agriculture Policy Research Institute, reiterates low commodity prices can indeed cool otherwise hot land markets. For example, the United States Department of Agriculture’s National Agricultural Statistics Service reports the average value of Iowa farm real estate fell from US$8,320 per acre in 2014 to US$7,370 in 2016, a decline of 11 per cent. 

The fundamental issue, though, is an unbalanced buyer-to-land sales ratio. 

Westhoff says the amount of land available for sale in North America each year is “actually quite small,” while the number of potential buyers is very high. That body of purchasers, while predominantly comprised of other farmers and those within agriculture, also includes those from other sectors and industries because land is currently viewed as a good investment. 

Westhoff does not believe the latter group is largely responsible for the overarching increase in acreage costs, but it is a factor, and one which can vary in significance depending on the area in question. 

Other societal factors are also at play. If a major shift to plant protein consumption occurs or the demand for biofuels dries up as the world shifts to electric vehicles, for example, the subsequent impact on livestock and grain sectors could significantly affect the price of both land and machinery. 

“Changes in behaviour can make a huge difference,” says Westhoff. “We do long projections, and we know the future can be very different based on very minor tweaks in circumstance.”

Opportunity despite significant challenges

For many looking to purchase land or machinery, the associated price tag can seem insurmountable. However, Westhoff pushes back against the notion that such circumstances mean people can’t or should never try to break into farming or grow a farm business. 

“I guess an additional point I’d make is that people thinking about expanding their operations or getting into farming in the first place have a lot of considerations to weigh, and the right answer for one person will not be the right answer for another. Someone unable to put a lot of money down or who is having a hard time getting financing for a large purchase may not even have the option of purchasing farmland.

“For others, the choice of whether to buy or whether to rent is critical. The higher the ratio of the purchase price to the rental cost, the more sense it will make to rent for most people. It’s not a coincidence that most large producers in the United States rent much or even most of the land they operate.”

High land values indicate people expect that land to be profitable. Lenders, by consequence, are more willing to work with those making significant purchases, and decent returns can help ensure the venture is profitable over the long term. 

“This is a good thing as new people need to be profitable. It’s situations like low profitability and high farmland prices which we want to avoid,” Westhoff says. 

Mussell also believes there are still opportunities for new or smaller farmers despite high entrance costs. Managing to maintain another income stream, seeking out niche markets, and a general willingness to work many long hours goes a long way. 

“It is tough. But for people who are committed to it, it’s not like there are no possibilities.”