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After a precipitous fall in recent years, farmland values have started stabilizing in parts of the Midwest and are even showing strength in Washington state.
But out in California, where prices for land had never stopped rising until recently, a decline in high-value crops, such as nuts, is causing the market to cool.
"From our perspective, land values have leveled out here across most of the row cropping area and found that bottom," said Sterling Liddell, a Rabobank analyst in St. Louis. "One of the reasons we say that is we're finding a lot more interest in the land."
According to Liddell, farmland prices are "now where we would consider them at their fundamental value, which is the ability to produce a profit at long-term commodity prices."
Analysts say private capital funds and institutional investors are increasingly becoming bigger players in acquiring agricultural real estate, whether high net worth individuals, pension funds, insurance companies or farmland-focused real estate investment trusts.
Farmland is good for the mix in portfolios, said Chris Morris, a manager at LandFund Partners II, a private farmland investment fund based in Nashville, Tennessee. "It provides a current yield which is pretty attractive … in a world where Treasurys are below 2 percent."
Experts say farmland also serves as a hedge of sorts against inflation.
"All of the crops grown on row crop farmland at least are dollar denominated, so if we were to get an inflation scenario then those rents go up and therefore values would also go up," said Morris. "So it's kind of a very versatile asset in a portfolio for all those reasons."
LandFund's first two limited partnerships are fully deployed and own cultivated row crop Delta farmland in Mississippi and Arkansas. Morris said owning farmland in those two Mississippi Delta states means the fund gets real estate for "one half of what it would be for an acre in the Midwest."
Farmland values in the Midwest fell 1 percent in the fourth quarter from the third quarter of 2015, according to a Federal Reserve Bank of Chicago survey of nearly 200 agriculture banks across the Seventh Federal Reserve District, which includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin. The report also revealed that in Wisconsin, a state enjoying growth in the dairy sector, there was a small rise in the fourth-quarter ag land values compared with a year ago.
In the Corn Belt, most of the landowner investors have been traditional land accumulators that tend to lease out the land and are looking for more acres. But lower commodity prices are hurting cash rents for cropland and recent projections from the U.S. Department of Agriculture point to further moderation this year in rents along with lower farm incomes.
Overall, the USDA forecasts that the value of ag-related real estate will be down 1.2 percent in 2016. The government projects net farm income will decline by 3 percent.
In related data, some of the Mountain States (Colorado, northern New Mexico and Wyoming) experienced an 8 percent jump in ranchland values in the fourth quarter compared with the prior year, according to the Kansas City Federal Reserve Board's Omaha Branch Ag Credit Survey. Farmland values in Oklahoma, where there's a strong cattle market, continued to rise modestly in the fourth quarter.
In the Pacific Northwest, there's been strength in farmland values especially in Washington state. In late 2015, heavy rains and snowfall ended the drought in major portions of the Evergreen State.
"Washington state land values are staying strong on farmland because of the demand there and influence from increased demand from investors and people wanting to diversify out of the California area into permanent crops," said Randy Dickhut, a real estate broker at Farmers National in Omaha. "There are ones that have been steadily buying land that continue to buy land as the market goes up or goes down."
In California, some areas have seen farmland more than double in value in the past decade. However, in recent months farmland prices have weakened noticeably in the San Joaquin Valley — a key ag region known for its high-value crops such as almonds, pistachios and walnuts.
"What's happened since last fall is we're seeing a sharp decrease in some of the major nut prices," said California farm economist Vernon Crowder at Rabobank in Sacramento. "We believe that has caused a lot of sales to stop."
There's even unconfirmed reports of some escrows getting renegotiated for California farmland as investors rethink the profitability of the deal. Nut prices were so strong at one point that it actually made up for the higher price of water given California's ongoing drought.
As farmland values cool in California, it could spur investors to take another look at ag real estate. "I would say the institutional investors I hear from are thinking that some of this price moderation will make things more affordable for them."