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AFOREIGN INVESTMENT IN U.S. FARMLAND

ISSUE BRIEF NUMBER IB78064

AUTHOR:
.Perri, Karla

Environment and Natural Resources Policy Division

THE LIBRARY OF CONGRESS
CONGRESSIONAL RESEARCH SERVICE

HAJOR ISSUES SYSTEM

DATE ORIGINATED Q‘74<_)§41_§
DATE UPDATED Q'_7_L3_1[§9_

FOR ADDITIONAL INFORMATION CALL 287-5700

0731

CRS- 1 IB78064 UPDATE-07/31/80

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Reports of substantial foreign investment in 0.5. farm real estate have
caused widespread concern among the nation's farmers and others. Rumors
claim foreign investors are buying up to half of the available farmland,
paying more for the land than domestic investors, and are thus making it
difficult or impossible for the small family farmer to obtain needed
farmland. some people fear this is a problem that will result in
deterioration of rural communities and natural resources. Others believe the
extent and effect of foreign investments are insignificant.

In October 1978 congress passed the Agricultural Foreign Investment
Disclosure Act (P.L. 95-460), which establishes a nationwide system for
monitoring current landholdings and future 0.5. farmland purchases by foreign
investors. Section 5 of the law mandates study and analysis of the effects
of these purchases on 0.5. agriculture. USDA analysis of the registration
data has been completed. In addition, legislation has been introduced which
would restrict foreign ownership of 0.5. agricultural land.

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By any measure, farm real estate is an excellent investment. The average
price of 0.5. farmland has doubled in the past five years. In 1972, the
average price for an acre of farmland in the Q8 contiguous States was $216.
By early 1979 the figure had reached $559, an increase of 158%. The national
xverage price has jumped by as much as 36% per year (1979), and in the Corn
Belt and Lake States yearly increases have ranged from 20 to 40%. An acre of
land cost an average of $1,203 in the Corn Belt last year.

This dramatic escalation in farm real estate values was preceded by
several decades of steadily increasing prices. Between 1967 and 1977, the
compound average rate of increase was 10.fl% per year, and the average
farmland prices have not shown a year-to-year decline since 1955. As is
evident from Table I, farm real estate has been a much more stable investment
than common stocks in recent years.

CRS- 2 IR7806fl UPDATE-O7/31/80

Table I

INDEXES OF COHMON STOCK PRICES AND U.S. FARM REAL ESTATE VALUES, 1971-78

Common Stock . Farm Real Estate
NYSE Composite Index Average Value Per Acre
1970=1OO A
1971 119 104
1972 132 113
1973 126 R 128
197fl 96 160
1975 100 182
1976 119 207
1977 117 2&2
1978 117 263

1979 128 300

CRS- 3 IB78064 UPDATE-O7/31/80

Both foreign and domestic investors have-been attracted by the magnitude
and stability of appreciation in land values, but the farm real estate market
is a limited one. The 0.5. has slightly more than 1 billion acres of private
farmland, but only a fraction (2-3%) normally comes on the market in any one
year. Even then, it is most often purchased by existing farmers. Between 55

" and 63% of the tracts offered for sale are purchased by farmers to enlarge,

their operations. In 1977, tenants, owner operators, and retired farmers
combined purchased two-thirds of the acreage sold. Local non-farmers
purchased 10% of the transferred acres, while absentee owners accounted for
15%. The value of annual land sales averaged $11 billion between 1971 and
1977.

0.5. farmers purchase land for two general reasons: to obtain long-term
profit through capital appreciation of land values and to expand operations
to increase annual farm operating returns. Recent press accounts indicate
that nonresident alien investors may have other incentives. High quality
land in Europe sells for 50 to 100% more than comparable land in the 0.5.,
and the large tracts preferred by investors are reportedly difficult to
assemble in other countries. Any weakening of the 0.S. dollar makes American
farmland even more attractive. Furthermore, tax law and rent controls vary
in restrictiveness throughout Europe and are generally viewed as being less
restrictive for landowners in the United States. Finally, many wealthy
Europeans seem to fear that political instability in their own nations may
eventually lead to nationalization of private property. They seek a haven
for their capital in 0.3. farmland, and some are reportedly considering North
America as a future home.

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Due to the previous lack of concrete data on foreign investments a number
of assumptions have been particularized to foreign investors in 0.5.
farmland. It has been asserted, for example, that foreign investors
frequently pay more than the prevailing market price for land, and may thus
inflate land prices beyond the reach of small family farmers. Concern is
also expressed that significant foreign ownership could compromise 0.5.
control over food production, with possible adverse affects on domestic food
prices and international trade and relations. Fears have also been expressed
that foreign investments may be followed by immigration, intensified job
competition, and other undesirable effects. Finally, it has been charged
that foreign investors, as absentee owners, would neglect local community
activities and responsibilities, would not be inclined to utilize local labor
or inputs supplied by nearby merchants, and would either abuse farmland
through overuse or leave it idle for purely speculative gain.

Counter arguments generally emphasize the limited availability of land for
foreign investors. If, in fact, foreign investors paid higher prices for
land, the volume purchased is probably so small that its impact on overall
prices would be slight. Furthermore, active bidding by 0.S. farmers and
other domestic investors is considered the most important determinant of real
estate prices. In addition, experts do not foresee foreign ownership so
extensive as to jeopardize 0.5. food supplies or cause large populations
influxes. Rather, they view foreign buyers as other absentee owners, who
generally turn over management of the farm to local operators, and who

tilize local labor and inputs. Finally, it is often pointed out that 0.5.
investments abroad far outweigh foreign investxents here. Restrictions on
alien investment could thus have economic or political repercussions.

CBS- Q IB78064 UPDATE—OI/31/80

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The Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA -- P.L.
95-H60) requires USDA to collect infornation on foreign investments in
farmland and to analyze the effects of these purchases on U.S. farmland. By
October 1979 USDA had received 7500 correctly completed forms. However,
August 1979 was the cutoff date used to allow tire to analyze the data and
prepare the report. Therefore, only 3,784 forms were analyzed. The
following paragraphs sunnarize the findings.

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Pursuant to the Act, a "foreign person“ is defined as "any individual who
is not a 0.5. citizen or who is not lawfully admitted into the United States
for permanent residence...Foreign governments, and entities which are created
under the laws of or have their principal place of business in a foreign
country, are also considered foreign persons under the Act.“ A corporation

or ,other business Aentity in whiczh _fo_re_ign _qw_,n.ersh_i_p__ Atqtals  _5%_ -q1:_ u9::_e__li_s,.

deemed to have a significant or substantial degree of foreign control and
rust register its holdings under the regulations promulgated by the
Secretary.

"'Agricultural land‘ is defined in the Act as all land used for
agricultural, forestry, or tinber production purposes..-{and] idle land if
its last use within the past 5 years was for agriculture, forestry or timber
production purposes."

Foreign investments in faraland were divided into two categories:
investments by a 0.5. corporation with foreign-owned interests, (i.e.,
foreigners who hold a direct interest in the land or a significant interest
or substantial control of the entity (corporation), or shareholders of
foreign residency who hold 5% or more of the interest in an entity). and
foreign investors not associated with a corporation. It was found that
corporations own 81% of the total acreage— reported as agricultural land;
partnerships account for 10% of the acreage, and individuals account for
7.5%. (NOTE: "A large portion of the land. reported, 1,289,572 acres, is
forest or timber land. A number of U.S. tinber companies are partially or
solely owned by foreigners. Thus deemed to be ‘foreign persons‘ they are
required to report their holdings. This represents 45 percent of all
reported agricultural land processed in tile for the...[USDA]... report.
Bach parcel averages about 902 acres, approximately 2.3 times greater than
the holdings of pcropland.“ SOURCE: USDA-ESCS-"Foreign Ownership of
Agricultural Land. February 1980.) Ownership status was not listed on the
reaaining 1.5% of the farms. noreover, it was established that corporations
buy ten times as much acreage as individuals. This has been viewed as a
positive asset by some, because this signifies that corporations purchase
whole farms rather than small tracts. Thus, the nunber of farms in the
connunity is maintained.

TABLE 1.

CBS- 5 IB73064 UPDATE-07/31/80

ACREAGE OF U.S. AGRICULTURAL LAND HOLDINGS,
BI TIPE OF FOREIGN OWNER, 1979

Type oi Owner

Individual
Corporation
Partnership
Estate
Trust
other

Total

source: USDA,

Number of Number of
Owners Parcels
Reporting Reported Acres
1,215 1,379 216,563
544 1,660 2,306,696
.223 276 298,686
7 10 1,071
32 59 35,506
a 8 1,076
2,025 8,392 3,899,998

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Agricultural Economic Report #407, Washington, D.C.
February 1980.

CRS- 6 IB78064 UPDATE-07/31/80

9922221 of Origin

of the 0.5. corporations with foreign interests, the largest investor is
the United Kingdom (U.K.), which holds 52% of the foreign-owned land,
followed by Luxembourg and Pest Germany. The majority of nonvcorporate
affiliated foreign investments are owned by West Germany, Canada, and The
Netherlands.

host foreign investments (70%), are paid for in cash- The remaining i30%
are paid on credit, trusteeship, inheritance, etc.

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The largest increase in foreign investments in farmland occurred during
1977 and 1978. This, however, could be attributed to a lack of information
in previous years and the fact that earlier acquisitions (pre-1970) have been
transferred (to different owners) or sold, with no records available for
analysis.

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Foreign investors do not appear to be significantly altering the initial

land use (farming). only 2.7% of the reports indicated that some change was
intended for land acguired.+

Tenure

Speculation has been raised that foreign investors would contribute
substantially to absentee ownership. Absentee owners are perceived by some
as a detriment to the social well-being of the farm community. They are not
present to contribute to and promote socially recognized goals and standards
of living. They are also perceived as poor conservationists, either
interested in short-term productivity, thereby abusing the land, or not
interested in adequate land maintenance. It is also asserted that absentee
owners foreclose the opportunities for small farmers to begin farming, by
purchasing large amounts of land. This then precludes acguisitions of small
tracts for young farmers to own or lease. In eevaluating the data, the
opposite was found to be true. First, about 20% of all 0.5. farmland is held
by absentee owners. Foreign or domestic origin is therefore not a factor
that precludes absentee ownership. Additionally, 40% of all 0.5. farmland is
leased, thereby not foreclosing opportunities to young farmers. Of this
leased land, 90% is held by non-operating owners. In fact, leasing has been
a traditional method of acquiring farmland. Second, since foreign owners
tend to buy whole farms, rather that tracts, they will not contribute to
reducing the number of farms in the community. This will lend stability to
the community, since new foreign owners tend to retain the operator currently
managing the farm. Furthermore, retaining the previous owner as an operator
means that the farmland will not become idle, and the productivity of the
community will not be reduced. Foreign investors report a change of operatof
on one—fourth of the farms. Finally, there has been no significant evidence
that absentee owners, foreign or domestic, engage in poor land use practices.

cns- 7 1s73o6u UPDATE-07/31/so

To support this notion it should be proven that land is used differently by
absentee owners than by owner-operators. In addition, there are strong tax
incentives to invest in conservation practices, and other land use
improvements, especially if productivity will increase in the long run.
There is also no conclusive evidence indicating that absentee landowners are
inefficient because they lease rather than manage their own land.

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one of the most frequent complaints about the impact of foreign owners is
that they will pay more than domestic investors for farmland. when there is
additional demand in the market place this will have an effect on price. The
cost of buying farmland has increased; however, it has been sporadic, ranging
from one year to the next, and often varying with geographic patterns of
development. Since many foreign investors buy whole farms, they distribute
the transaction costs, causing the price per acre to be lower. Foreigners
may capitalize on tax advantages in capital gains; however, the Congress is
now seeking to amend the Internal Revenue Code by imposing a nonresident
alien (individuals or corporations) tax on real property interests, such as
farmland. Last, although the social and political risks at home may make
0.5. investments nore appealing to foreigners, it cannot necessarily be
associated with buying farmland or causing an artificial increase in the
price of farmland. In fact, there is no reason for foreigners to pay‘ more
than the market price for farmland; alternative investments are always
available. A

Le9el-l§§2s§-£9rteini29-29_£sQeral Reetriesiene

As public concern has increased, demands have been made for Federal
legislation to restrict foreign investment in agricultural land. Two recent
CR5 analyses examined some legal questions such legislation might raise (see
REFERENCES)-

Citing the Federal powers over naturalization of aliens, regulation of
interstate and foreign commerce, and provision for inational defense, the
analysis concluded that there was a significant legal basis for Federal
restrictions on foreign investments. With respect to the effect of Federal
restrictions on State laws, one study stated “...it would appear that if the
Federal Government legislatively deprived foreign persos of the power to own
or purchase agricultural land, the extent of pre-emption would depend in part
upon the nature of the Federal law. If the Federal law expressly intended to
pre-empt the field, even more strict State laws would be invalidated. If it
did not attempt to pre-empt the field, only less strict State laws would be
invalidated."

0.5. international treaties pose another possible problem. A second CRS
study noted “it would appear that new Federal legislations restricitng the
rights of aliens to own property in the United States might conflict with
present treaties but would not be invalidated because of such conflicts.
State laws restricting the rights of aliens to own, devise, or inherit
property, however, might not only conflict with existing Federal treaties but
also be invalidated because of such conflict."

CBS’ 8 IB78064 UPDATE-O7/31/80

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H.H. 1372 (Grassley)/S. 208 (Hallop)

Subjects foreign investors to capital gains tax on gain from the sale of
real property situated in the United States. H.R. 1372 introduced Jan. 24,
1979; referred to Committee on Ways and Means. Hearings held Oct. 25, 1979.
S. 208 also introduced Jan. 24, 1979; referred to Committee on Finance.
Hearings held June 25, 1979-

H.B. 1212 (Fuqua)/H.R. 1319 (Akaka et al.)/H.R. 2297 (Duncan, J.)

Introduced Jan. 22, 1979, Jan. Q4, 1979, and Feb. 21, 1979,
respectively. Each reported to senate Committee on Finance December 1979.
Each bill amends the Internal Revenue Code to impose upon nonresident alien
individuals, or foreign corporations, a tax equal to one-third of 28% of the
capital gains realized from the sale of real property interests (farmland).

5.194 (ncGovern et al.)

Regulates and controls the acquisition of U.S. agricultural land, by
foreign persons by requiring a permit from the Secretary of Agriculture for
such acquisition. Introduced Jan. 23, 1979; referred to Committee on
Agriculture, Nutrition, and Forestry.

E§AElE§§

U-S. Congress. House. committee on Agriculture. Subcommittee
on Family Farms, Rural Development and Special Studies.
Impact of foreign investment in farmland. Hearings,
95th Congress, 2d session, on H.R. 13128 and related bills.
June 20 and July 19, 28, 1978. Washington, U.S. Govt.
Print. Off., 1978. 433 p.

U.S. Congress. House. Committee on Government Operations. Commerce,

Consumer, and Honetary Affairs Subcommittee. The operations

of Federal agencies in monitoring, reporting on, and analyzing

foreign investments in the United States (part 2--OPEC

investment in the United States). Hearings, 96th Congress,

1st session. iashington, U.S. Govt; Print. Off., 1979. 476 p.
Hearings held July 16-26, 1979.
LRS79-16669

U.S. Congress. House. Committee on Ways and means. Taxation of
foreign investor direct and indirect ownership of property in
the United States. Hearing, 96th Congress, 1st session.

Oct. 25, 1979. Washington, U.S. Govt. Print. Off., 1980.
84 p.
"Serial 96-43“

U.S. Congress. Senate. Committee on Commerce, Science and
Transportation. Authorization for the International
Investment Survey Act. Hearings, 95th Congress, 2d
session, on S. 2928 to amend P.L. 94-472. Apr. 19, 1978.
Washington, U.s. Govt. Print. Off., 1978. 114 p.

“Serial no. 95-84"
LRs78-7321

CBS‘ 9 IE78064 UPDATE-07/31/80

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0.5- Congress. House. Committee on Agriculture. Agricultural
Foreign Investment Disclosure Act of 1978; report together
with additional views to accompany H.R. 13356. Washington,
0.5. Govt. Print. 0ff., Sept. 10, 1978. 29 p. (95th
Congress, 2d session. House. Report no. 95-1570)

0.5. Congress. Senate. Committee on Agriculture, Nutrition,

and Forestry. Agricultural Foreign.Investnent Information
Act of 1978; report to accompany S. 3384. [Hashington, 0.5-
Govt. Print. 0ff-] Aug. 8, 1978. 27 p. (95th Congress,

2d session. senate. Report no. 95-1072)

LRs78—9585

-t-—— Foreign investment in United States agricultural land.
Washington, 0.5. Govt. Print. Off., January 1979. ‘292 p.
At head of title: 95th Congress, 2d session. Committee
print.
LRS79-266

0.5. Congress. Senate. Select Committee on Snall Business.
Ownership and control of farmland in the United States.
Washington, 0.5. Govt. Print. Off., 1980. 19 p.

At head of title: 96th Congress, 2d session. Committee
print. A
LRS80-62

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02/00/80 -- USDA submitted a report to Congress, "Foreign
Investment of 0.5- Agricultural Land."

08/06/79 -- Deadline for aliens or foreign interests who oyned
farnland before Feb. 6, 1979, to report ownership
to 0.5. Department of Agriculture.

07/30/79 - GAO published report "Foreign Investment in 0.5.
Agricultural Land --How It shapes Up."

10/10/78 -- President signed 3. 3380, Agricultural Foreign
Investment Disclosure Act (P.L. 95-460).

10/02/78 -- Senate agreed to House amendments on S. 3384
by voice vote.

09/26/78 -- House passed H.R. 13356 amended -- Agricultural
Foreign Investment Disclosure Act. Subsequently
passed 5. 3384 in lieu, amended to contain House-passed
language.

09/10/78 -- House Committee on Agriculture reported out H.R. 13356
with anendment.

CR5~10 IB7806h UPDATE-O7/31/80
08/11/78 -- Senate passed 5. 3384.

08/08/78 - senate Committee on Agriculture, Nutrition, and
Forestry reported out S. 3384.

06/12/78 -- GAO published report “Foreign Ownership of 0.5.
Farmland —- Much Concern, Little Data.“
04/00/76 - Department of Commerce published report "Foreign

Direct Investment in the United States," showing
4.9 million acres of 0.5. land owned by nonresident
aliens in 1975.

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0.5. Department of Agriculture. Foreign investment of
0.5. agricultural land. BSCS agricultural economic
report no. Q47. February 1980.

1 ---- State and Federal legal regulation
of alien and corporate land ownership and far: operation.
Economic Research Service. AER-284. 1975.

---— summary of the report: foreign investment in 0.5. real
estate. Economic Research Service. AIB-H00. December 1976.

0.5. Department of Agriculture. Gene L. iunderlich. Foreign
ownership of 0.5. real estate in perspective. Economics,
Statistics and Cooperatives Service. BSCS 24. June 1978 (?)

0.5. Departnent of Commerce. Foreign direct investment in the
United States. Especially volume 8, appendix L, "Foreign
investment in land" and appendix H, Fred L. Morrison, “Legal
regulation of alien land ownership in the United States.“
April 1976.

0.5. General Accounting Office. Controlling foreign investment
in national interest sectors of the 0.5. economy. ID-77-13.
Oct. 7, 1977.

0.5. General Accounting Office. Office of the Conptroller
General of the United States. Foreign ownership of 0.5.
farmland -- much concern, little data. Washington, 0.5.
General Accounting Office. June 12, 1978. CED-78-132.

0.5. General Accounting Office. Foreign investment in agricultural
land -- how it shapes up. July 30, 1979. CED-79-110.

0.5. Library of Congress. Congressional Research Service.
Farmland ownership trends. June 7, 1977.

---- Congressional Research Service. Certain questions
respecting federal limitations on foreign investment in
agricultural properties. Hay 15, 1978.

Congressional Research Service. Foreign ownership of
property in the United states: Federal and state

CBS-11 IB78064 UPDATE-07/31/80

restrictions [by] Hovard D. Zaritsky. [Washington] July
11, 1978. 30 p. Hultilith ‘I8-11155.

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