During the past few years, federal farm spending has helped keep many in agriculture solvent. But one side effect has been rising cropland prices. Increased ag real estate price, it turns out, is a double-edged sword.

For all its good intentions, the 1996 farm bill didn't deliver as promised. Writing with the idea that exports would be strong and commodity prices would follow suit, the authors of the bill figured to curb government farm spending without negative effect on the farm economy. Economic analysts saw the same picture and predicted that agricultural land prices, given strong export demand and solid commodity prices, would continue to climb. Hindsight reveals a different reality: Prices and exports fell, but land prices held and even increased. An economic conundrum for the ages? Only if you failed to see the effects of federal farm spending on ag land prices.

Unintended consequences
When Freedom to Farm ran headlong into slumping exports and red-ink commodity prices, lawmakers moved quickly to support their ag constituents through emergency spending and supplemental supports. If not for these moves, there is little question that many producers would have failed. But for rural America, there is a larger perspective that has only recently become apparent.

Think of it as if Uncle Sam moved into a suburban neighborhood and started passing out cash to folks who were a "little short." Recipient homeowners use the money to put in new windows and lovely, matching crepe de chine drapes. New windows and drapes boost future values on the sale of the property, no doubt. But if Uncle Sam decides to stop helping and move out of the neighborhood, residents will awaken to the sounds of sloughing drapes and the chisels employed to remove those new windows. He's taking them with him. Consequently, property values suffer.

Minus this last tangled metaphor, it suffices to say that federal spending is propping up land prices.

Enhanced land value
According to a 2001 report from the USDA's Economic Research Service, farm commodity program payments have contributed some 24 percent of the market value of farmland in their designated Heartland area (roughly the Corn Belt). The report estimates that these payments account for $40 billion worth of enhanced land prices. That's about two-thirds of the "enhanced" value that the report attributes to government payments, urban influence and other causes.

Most farmers don't need to see the charts and graphs for overall farm income in the last few years. They know their cash receipts from crop and livestock sales fell while government payments, often the difference between profit and loss increased. And they don't need a reporter to tell them land prices are climbing or at least solidly steady. Between using land as collateral and watching cash-rent rates climb, that much is obvious. Still, the federal payment/land-price relationship that has been established since Freedom to Farm has more subtle impacts.

Barrier to entry
Land prices are based on the ability of a parcel of land to produce income over time. Figuring government payments into the long-term income of land is a disadvantage to farmers who don't have existing assets enough to pay against that added long-term value. According to the ERS, direct government payments to agriculture totaled $22.9 billion in 2000, accounting for nearly 40 percent of net cash farm income. That is up from less than 4 percent in 1980. Only 8 percent of those payments fit under conservation and miscellaneous programs. That means an overwhelming percentage, at least in recent years, has been tied to commodity programs and disaster relief.

Whether that is more advantageous for "family farms" greatly depends on defining those farms, but Bruce Gardner, an economist with the Department of Agricultural and Resource Economics at the University of Maryland, points out one problem with current portfolio of farm programs. They form a barrier to entry for some farmers.

"I think of them as the young people who want to get into farming. They don't have any land assets. They have to rent land to farm in order to reach the scale you need to have a good shot," said Gardner.

Keeping young, upstart farmers out of agriculture may not be a direct driver for expansion of existing farms, but the disadvantage to farmers without land assets is universal. Acquiring land to begin an operation or for expansion takes significant assets.

"I don't think it is a barrier to expansion to the people who are already well established because they have a secure asset base. If you own land and your credit is good, you could expand," said Gardner.

One neutralizer in this equation, according to the ERS report, is when government payments are tied more closely with production than ownership. From the ERS report:

Production flexibility contract payments (PFCP) are tied to ownership of cropland with a history of enrollment in commodity programs. Consequently, landowners may [can] capture relatively larger proportions of PFCP benefits. But loan deficiency payments (LDPs) depend on current production and commodity prices. Because LDPs are paid on each unit produced, farm operators have an incentive to increase production through greater use of fertilizer, herbicides and other inputs. As a result, input suppliers capture a share of LDP benefits and consequently, LDPs may have a lesser effect on cropland values than PFCPs and other decoupled lump-sum payments.

The long haul
Regardless of today's politics or the political climate in a year or two, implications of government-payment-driven land prices will take some capriciousness from future farm policy. Programs will not only be viewed for their immediate effects on agriculture, but also through the new lens of land prices.

"That's a problem," said Gardner. "I do think it is a problem in the sense that we've got agriculture in a position in which our government really can't stop doing what it is doing without causing a substantial decline in cropland values. Or at least, it couldn't happen very quickly."

Gardner said he has been working on what land prices would look like if government payments had never become part of the equation. That research causes him to question the $40 billion worth of land valuation in the Corn Belt. He figures it might be less. As for the long term effect brought on land prices from current farm policy: "I'm an optimist," he said. "I believe that as we go through this next farm bill, there's a reasonable chance that the commodity markets are going to strengthen.

"At some point these exports that haven't shown up will.

"Yes, some [foreign] exporters are moving along, [capturing existing market share] but import demand in some of these areas will pick up. We'll see a strengthening in these markets and the underlying crop prices will rise. That means eventually these land prices will be supported by a market."