Some Questions of Value and Scale in American Agriculture

A most revealing characteristic of an economic system is the value it places on land. The modes by which that value is expressed and the methods of its reckoning are identity criteria of fundamental significance. In a market economy, the linkage between this value structure and the income flows that support it provide a trend indicator that is akin to body temperature in the human anatomy. Using this parallel, we must conclude that the American agricultural economy is feverish. For the forty-eight contiguous states, agricultural land values tripled since 1967, with over 80% of that increase occurring since 1972. The increase has not been uniform among states, with the greatest increases centered in states of the Corn Belt, and in North Dakota, Montana, Pennsylvania, and West Virginia. The smallest increase occurred in California, and increases were below the national average in Arizona, New Mexico, the southern Great Plains and Mississippi Delta states, and all states of the Southeast except Georgia, South Carolina, and Virginia (U.S. Department of Agriculture 1977a, p. 22). In broad terms, cash-grain crop producers have benefited most from recent land value changes, while producers of cotton, fruits and vegetables, other specialty crops, and animal products have lagged behind. Farm expansion buyers have been the dominant force in this recent upsurge of land values, accounting for 63% of all purchases for the year ending 31 March 1977. In Corn Belt counties (for example, in southwestern Minnesota) this figure approaches 80% (Christianson, Nelson, Raup, p. 19). With some exceptions in areas adjacent to large urban centers, these high farm land prices are not the result of an invasion of the farm land market by nonfarm buyers. The principal strength in the current land market is provided by farmer demand for tracts of land to add to their holdings. This is a reflection of the financial capacity created for existing farmers by the windfall gains of land price inflation. If a farm is debt free or burdened with only a small mortgage, an established farmer can spread the cost of additional land over his entire acreage and bid this advantage into a higher price offer for any land that comes onto the market. A recent study of Illinois farms shows that, if the farmgate price of corn is $2 per bushel, it would have required the income-producing capacity of approximately three acres to finance the purchase of one additional acre, at 1976 production costs and land prices (Scott). This provides a rough measure of the extent to which land prices have been inflated by the demand from farm expansion buyers. A farmer who is not in the top segment of farm income receivers, and who does not own a substantial acreage of debt-free land, is virtually priced out of the current land market. The danger in this situation lies in the threat f land market instability. For two years we have experienced the phenomenon of falling farm product prices and rising land values. One interpretation of the current land market is that it exhibits many of the characteristics of a inflationary boom that is nearing its bursting point. To assess this possibility we need data that we do not have on the nature of the total demand structure for farm land. The component of that structure for which we have the most copious data is the demand for the products of land. In a recent discussion, Gardner has suggested that "perhaps the demand curve facing American producers of farm commodities has become much more Philip M. Raup is a professor in the Department of Agricultural and Applied Economics, University of Minnesota. Paper 1694 of the Miscellaneous Journal Series, Agricultural Experiment Station, University of Minnesota. This paper is an expansion of testimony presented at a Hearing on "Obstacles to Strengthening the Family Farm System: Competition for Land," conducted by the Subcommittee on Family Farms, Rural Development and Special Studies, Committee on Agriculture, U.S. House of Representatives, at Marshall, Minnesota, on 15 October 1977.