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**Land Values and Rental Rates**

***Background***

Farm real estate accounts for nearly 79 percent of U.S. farm assets.
Rental rates and market values for land affect returns from agricultural
production, wealth of agricultural landowners, and the number of new
entrants into agriculture.

Agricultural land value for the most part reflects the value of
production from that land, but may also include the potential for
development and recreational uses. Agricultural policies designed to
increase agricultural income may become capitalized into land values and
therefore increase land prices. This dynamic affects landowners and
tenant farmers differently.

Agricultural land values rose sharply in the 1970s and early 1980s,
declined rapidly between 1982 and 1987, and have risen steadily since
1987. However, the 2002 inflation-adjusted land value was still 23
percent below the 1981 peak. In 2003, there were 927 million acres on
U.S. farms and ranches; 29 percent were fully owned and operated by the
landowner, 11 percent were managed by tenants, and 60 percent of
agricultural operations were partially owned and partially rented by the
operator. In 2002, approximately 38 percent of all farmland was rented,
while approximately 50 percent of planted cropland was rented.

Tax law can affect agricultural land values. For example, Like-Kind
(Tax-Deferred) Exchanges, or IRS "1031 tax deferments," can affect rural
farmland values. Under "1031 tax deferments," landowners selling land at
a profit can defer taxes on that profit by using the proceeds to acquire
similar property for business or investment purposes. These taxes can be
significant because urban expansion has caused a rapid increase in
nearby agricultural land values. As farmers and ranchers sell land in
these urban affected areas, they may acquire farmland in more rural
locations to avoid taxes. Some contend that this process increases
demand for agricultural land in rural locations, thereby raising rural
agricultural land prices.

Land value increases also affect new farmers differently than other
farmers. High land values are a barrier for new farmers seeking to
purchase land. High rental rates are a barrier for new farmers seeking
to lease land. However, rental rates reflect, among other things, the
demand for agricultural land in an area. Often, demand for this land
comes from established farmers seeking to expand their operations.
Policies that lower land values would decrease the value of assets of
current landowners and would not necessarily reduce competition for
cropland.

***General Opinions Expressed***

-   The prominent issue raised over land values and rental rates was a
    broad concern over the availability of agricultural land for
    agricultural production. Many respondents raised farmland
    availability as a concern---whether the next generation of farmers
    and ranchers would be able to acquire lands and enter agriculture.
    Responses revealed a diverse set of perceived forces threatening
    agricultural lands, but at the core was a belief that agriculture
    was under pressure from the loss of good productive land caused by a
    number of sources.

-   Respondents either stated or implied that higher land values were
    caused by increased nonfarm competition for agricultural land.
    Estate taxes preventing families from passing operating farms and
    ranches to the next generation, urban expansion, agricultural
    subsidies, corporate acquisitions, global markets, the Conservation
    Reserve Program, "1031 tax deferments," and land purchases for
    hunting use were each cited as increasing agricultural land values.
    Recommendations ranged from a generic "lower land values," to ending
    agricultural subsidies, ending estate taxes, restricting use of
    productive lands to agricultural use, and purchasing developmental,
    agricultural, or conservation easements; several proposals involved
    matching new farmers with farmers approaching retirement.

-   Not all respondents were concerned over increasing agricultural land
    values, and the idea was presented that young people should pay the
    fair market value for the land.

-   Several respondents noted that land is like a retirement fund for
    the landowner---a reduction in earnings would negatively affect
    them. These comments tend to propose a system to link retiring
    landowners with beginning farmers, and a transition mechanism to
    assist the beginning farmer and compensate the retiring farmer.
    These proposals often included purchase of development rights, tax
    incentives, or Government assistance.

-   Other respondents expressed concern over eminent domain and/or
    threats to property rights.

-   Several comments concerned direct farm ownership loans. The
    respondents suggested increasing the maximum loan limit for the
    Beginning Farmer Down Payment Program and increasing loan lengths.

    ***Detailed Suggestions Expressed:***

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-   Prohibit non-farmers and corporations from buying farmland.

-   Require land prices to be based on actual value of the land for
    agricultural production. Phase out farm subsidies and let the market
    determine production and prices, except where environmentally
    sensitive lands are concerned.

-   Buy development rights on prime agricultural land, especially near
    urban areas.

-   Provide tax breaks to farmers who protect the land and do not
    pollute.

-   Begin to narrow and cancel out loan, insurance, and crop subsidies.

-   Create subsidies for new farmers to obtain land for the purpose of
    growing organic food only.

-   Provide measures to help farmers buy land at a fair farm use price.
    The farmer should be required to keep the land as is, even if sold
    to another farmer, for a specified time---such as 50 to 75 years.

-   Limit size of farm and/or number of animals.

-   Put money into buying developmental rights.

-   There should be some type of incentive for those who sell land to
    beginning farmers so that the money can be used, or set aside for
    retirement, without a huge tax.

-   Eliminate like-kind (tax-deferred) exchanges---IRS 1031.

-   Modify 1031 tax-deferred exchange to mitigate unintended
    consequences.

-   Phaseout 1031 tax-deferred exchanges.

-   Limit 1031 tax-deferred exchanges at \$50,000 to reduce the
    "artificial money" from metropolitan areas that is driving up land
    prices.

-   Expand IRS 1031 exchange for farmland to also include value-added,
    ag-related investments such as ethanol plants.

-   High land prices could be addressed with an agreement between older
    and younger farmers. For example, the agreement could stipulate that
    older farmers can continue to farm the land until they are ready to
    retire. When that time comes they agree they will sell the land to
    the younger farmer. In the meantime the younger farmer could begin
    to pay for the land. Another way to pay for land would be an
    agreement that a certain percentage of the profits from that land
    would first go towards the young farmer's expenses and a smaller
    percentage to the older farmer, and then another percentage to pay
    for the land. The Government should reserve a certain amount of
    money, which farmers could apply for---depending on their average
    income, farm size, size of their livestock herd, etc.---to pay for
    their land.

-   Do away with the "wildlife" subsidies. This is the cause of soaring
    land prices.

-   All land owners should be required to pay taxes on the land at
    purchase price.

-   Permanent repeal of the death tax so that we can pass farms and
    ranches on to the next generation.

-   The asset value of agricultural land is estimated at \$1.2 trillion.
    Some of the Government payments right now boost the land prices. If
    adjustments are going to be made for Government support programs
    that affect land prices, those adjustments must be evaluated very
    carefully and over a period of time.

-   Tax laws should recognize agricultural land and forest land as
    productive resources and such land therefore should not be taxed as
    development resources.

-   Offer landowners the opportunity to zone their land permanently for
    farming only, so one cannot do anything except grow food or
    feedstuffs on it. This will reduce the price of that land forever.

-   Increase the loan limits for Direct Farm Ownership and Farm
    Operating Loans. Increase the current limit of \$250,000 to
    \$400,000.

-   Provide tax incentives or benefits to landowners that sell or rent
    their property to beginning farmers.

-   In order to help beginning farmers, the \$250,000 limit on the
    purchase price or appraised value for property in the Farm Service
    Agency's (FSA) Beginning Farmer Down Payment Program should be
    increased to \$350,000.

-   Allow the use of FSA guaranteed loans in conjunction with tax-free
    bonds.

-   Increase the maximum FSA term loan for beginning farmer downpayments
    from the present 15 years to 20 or 25 years.

-   Permit FSA to offer guarantees of seller-financed contracts for deed
    and facilitate a secondary market to purchase those contracts.

-   Eliminate or modify capital gains taxes payable by sellers on land
    sales to beginning farmers.

-   Allow tax incentives for interest paid to sellers on land contracts
    to beginning farmers.

-   Allow tax incentives for interest income received by commercial
    lenders on guaranteed long- term loans to beginning farmers for
    acquisition of capital assets.

-   North Carolina's Farm Transitions Network uses a mentoring program
    to match young men and women who would like to enter agriculture
    with established farmers in their operation. They also provide
    farmers with counseling and opportunities to sell and lease
    development rights for income. This lowers the cost of farmland so
    that young farmers can transition into those very same operations.
    This program should be modeled at the Federal level.

-   Local towns and cities need incentives to offset land cost and could
    help new farmers acquire land as they do for strip malls.

-   Give farmers incentives and tax breaks to have their land designated
    forever as "farm production" land.

-   Lower property taxes for those willing to engage in conservation
    pursuits.

-   Somehow index production value of land back onto the land. Use a
    formula to get this land back into the hands of the next generation.

-   Help young farmers to start by giving a financial benefit to a
    retiring farmer who is willing to help, either through loan
    guarantees or payments. This would help offset the high price of
    land, so they could sell it to a young farmer at a lower cost.

-   Promote farmland protection/preservation with funding. Encourage
    partnerships with community agencies and farmland protection
    organizations whose objective is land protection.

-   Agricultural and conservation easements will help ensure that
    agricultural land remains designated as agricultural.

-   New farmers and ranchers should be strongly encouraged to begin
    farming and if that means offering land discounts, or even better,
    land trusts, we \[society\] should do it. The offer must not be for
    industrial or agri-business farms.

-   Provide funding for States to establish programs to link available
    farmland with new start-up farmers.

-   The Government should subsidize land for agricultural use. If,
    however, the land fell out of agricultural production, the subsidy
    would have to be paid back.

-   Restrict development to land that makes sense for its intended use.
    Keep the best farmland off limits to developers and the value will
    stabilize at farming values. This would provide a disincentive to
    convert the land.

-   Extend and fund the Beginning Farmer and Rancher Development
    Program, which was passed by Congress in the 2002 farm bill.

-   Increase promotion of the Beginning Farmer Land Contract Pilot
    program.

-   Link beginning and retiring farmers by providing incentives for
    retiring farmers to rent or sell land and other assets to beginning
    farmers on favorable terms.