AGRICULTURAL EXPERIME LAR 379 CALIFORNIA'S FARM REAL ESTAT 1930 A study of land va DAVID WEEKS 1 THE AVERAGE PRICE of farm land in California is higher than it has ever been. Calif ornians want to know what will happen next. In the early twenties, California real estate values had climbed to new heights. Within two years after war's end, United States real estate values tum- bled abruptly and to new lows, but California farm real estate remained nearly on its war-time high level for ten years, dropping then with the major general depression. Iu& an! BEFORE WORLD WAR I At the outbreak of World War I in 1914, land values in California and in the United States generally were rising. DURING WORLD WAR I Under influence of military action in Europe, inflation of United States real estate values set in before this country entered the war. Rate of increase of values in California paralleled those of the United States. After six years of inflation, California values had risen to 68 per cent above their prewar average, the United States to 70 per cent above. AFTER WORLD WAR I California differed greatly from the United States in behavior of land prices. United States prices dropped abruptly during the first two years, then con- tinued downward until in 1930 they were only 69 per cent of the 1920 peak. California prices dropped very slightly until 1931 when values were still 95 per cent of their 1921 peak. From 1930 to 1933 land values in the entire country fell to the lowest point reached between the two wars. At this low.point in 1933, California values were but 65 per cent of their 1921 high, still 9 per cent higher than their prewar level. United States land values in the same year were only 43 per cent of their 1920 high point and were 27 per cent below their prewar level. {2} SITUATION during two wars CHARLES H. WEST IN RECENT YEARS California ** farm real estate values, again in com- mon with United States farm real estate values, have climbed to even r higher levels than before. On March 1, 1947, farm real estate values in California were 45 per cent above their World War I peak, a greater increase than in any other state. Up to the closing months of 1947, land values were still rising but there were signs of an approaching end to this rise and some indication of a probable decline. 200 180 o < 160 UJ > < £ 140 in to o> 120 100 80 60 t rnia tv% I ^ i- 1 VALUc rcn Murcc. ur /. FARM REAL ESTATE 7' Co hfo s8888< 11 XXXXXr/ XXXXXfi ^— Unite Kb? oXX SO" 9 xx Id Warn; Wor M 1940 1945 1950 1955 BEFORE WORLD WAR II After recovering from the depression, farm land prices moved upward to 1937, then showed little change except a slight depression until America's entry into the war. DURING WORLD WAR II Even after the entry of the United States into the war, California increase in values got under way slowly. Finally California farm land values overtook those of United States, then after 1942 rose more rapidly. By the end of hostilities, California values reached 69 per cent above prewar average, while those of the United States reached 64 per cent above. AFTER WORLD WAR II Both the United States and California values continue their upward trend. By March, 1947, California values reached 102 per cent above prewar level, while United States values had advanced 92 per cent. WHAT WILL HAPPEN NEXT? 1 Professor of Agricultural Economics and Agricultural Economist on the Giannini Foundation and in the Experiment Station. 2 Formerly Director of Research, Farm Credit Administration, Berkeley. [3} FAR/A LAND^VALUES Definitions of VALUE and PRICE In this circular we are concerned with the market value of farm land and all of its fixed improvements which together may be more precisely described as farm real estate. For any indicated time or area the market value of farm real estate has the same meaning as the average price per acre of improved farm land. (For the sake of brevity, where the intended meaning has seemed clear, these longer and more precise expressions have been indicated by only a word or two.) ALL FARM LAND VALUES ARE AFFECTED BY INFLATION IN ALL TYPES OF FARMING inflation is present, but different types of farming have shown different rates of increase in land values. Up to 1947 orchard and vineyard lands have increased the most in price; dry farnied grain lands and range lands the least. Field crops and dairy lands have experienced an increase intermediate between these extremes. Table 1 shows how the dif- ferent types of intensively cropped lands of California have increased in value. IN ALL FARMING AREAS inflation is present, but the various areas of California have shown different rates of increase. In table 2 it will be seen that for the period tabulated, selling prices in the central valleys began lower and increased farther than in other areas, and continued their increase in 1947. On the other hand, Imperial Valley began at a higher point, showed less over-all increase, and even shows a decline in 1947. PERMANENT RISES are caused by- # Farm real estate improvements q More acreage put into intensive crops O Increase in land irrigated O Subdivision of land into small farms TEMPORARY RISES are caused by- % Commodity prices, through their relation to land income. These are the factors we are able to measure. THERE ARE OTHER INFLUENCES at work which are more difficult to measure. Among these are California's population increase, cost-reducing improvements in methods of farming, and construction of the Central Valley Project. In addition to these influences there are the uncertainties of the inter- (4} Table 1: INCREASE IN SELLING PRICES OF CALIFORNIA FARMS, SHOWING VARIATION BY CROP ' Expressed in percentages of the 1935-1939 average Year Citrus farms Deciduous orchard farms Vineyard farms All orchard and vineyard farms Field crop and dairy" farms All intensive types' 1 1933 143 107 90 121 103 111 1934 107 112 91 106 92 100 1935 103 99 80 98 103 100 1936 124 111 76 86 104 105 93 100 96 116 106 99 112 109 87 93 99 114 93 91 105 1937 110 1938 91 1939 92 1940 108 86 92 97 92 96 1941 104 97 127 105 100 99 1942 117 166 106 146 122 183 114 161 120 146 119 1943 157 1944 218 167 224 200 170 188 1945 257 200 256 235 194 220 1946 266 247 302 264 225 249 1947 'Jan-June) . 257 292 350 285 251 261 Source: Calculated from data of the Farm Credit Administration. a Excludes dry grain farms. b Excludes dry grain and range lands. Table 2: Calculated from data of the Farm Credit Administration. Table 2: INCREASE IN SELLING PRICES OF CALIFORNIA FARMS, SHOWING VARIATION BY AREA Expressed in percentages of the 1935-1939 average Year Sacra- mento Valley San Joaquin Valley Com- bined Central Valley Central Coast area Southern Coastal Plain Com- bined Coastal areas Imperial Valley State 1933 1934 1935 1936 1937 78 80 86 S2 110 108 106 91 102 115 129 147 168 203 219 98 93 90 96 114 109 94 100 115 123 159 190 225 254 279 95 91 89 95 113 109 96 99 113 122 154 183 216 246 269 113 114 104 112 102 82 98 90 89 106 144 165 201 264 278 124 105 106 112 110 82 88 99 99 120 163 200 231 247 235 121 107 106 112 108 82 90 102 102 117 158 191 224 251 245 145 90 80 104 102 107 109 117 96 122 144 176 211 211 206 111 100 100 105 110 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 (Jan. -June; .... 91 92 96 99 119 157 188 220 249 261 national situation together with plans for aiding foreign countries, the public monetary policy, legislative supports to agriculture, and, perhaps most impor- tant of all, the general level of national employment and income. {5} FACTORS THAT ADD PERMANENT VALUE TO LAND . . and that held California's farm land prices up after World War I Improvements in Farm Real Estate Land improvements have increased the productivity of California farm land many-fold. New vineyard plantings, orchards, irrigation systems, and other improvements have brought a higher gross and net return per acre. During the decade of World War I, compared with that of World War II a relatively greater part of the total rise in land prices was represented by land improve- ments resulting from important shifts in the use of land. Shift to More-Intensive Farming The shift from less- to more-intensive farming has been a shift from low to high gross returns per acre. Intensive farming produces more valuable crops TRENDS IN AGRICULTURAL LAND UTILIZATION IN CALIFORNIA 4 4 1910 1920 1920 1940 {6} per acre. In 1944 the average per-acre value of the crop produced on orchard and vineyard lands was $385, on vegetable lands $251, on intensive field crop lands $105, and on grain and unirrigated hay land $28. High returns per acre serve to raise the value of the land. As the agriculture of California has matured, the proportion of the more highly productive and therefore more valuable lands has increased. Table 3: VALUE OF CALIFORNIA'S MAJOR HARVESTED CROPS Major crops harvested 1944 Total value of crop Per cent of total Thousands of acres Per cent of total Per acre value of crop INTENSIVE CROPS: Fruits and nuts 1,000 dollars 578,534 136,048 268,181 79,752 54 13 25 8 1,503 543 2,554 2,855 20 7 35 38 dollars 385 Vegetables sold 251 Intensive field crops l EXTENSIVE CROPS: Small grain and grain and wildhay 1, 105 28 TOTAL 1,062,515 100 7,455 100 Source: Calculated from data in the United States Census of Agriculture, 1945. a Includes all corn and sorghums. b Includes mixed grains and oats cut and fed unthreshed. The period during and after the first world war was marked by a shift to more-intensive farming not equaled before or since. This shift was more than three times greater during the World War I period than during the World War II period. The total acreage of orchards, vineyards, and eleven intensive field crops, highly representative of California agriculture, increased 59 per cent in the decade 1910-1920, but just over 18 per cent in the decade 1935-1945. Table 4: TRENDS IN AGRICULTURAL LAND UTILIZATION IN CALIFORNIA Type of crop Census year 1910 1920 1925 1930 1935 1940 1945 (Thousands of acres) Small grains and wild and grain hay Eleven intensive field crops Orchards and vine- yards Other Cropland 3,730 1,060 949 5,451 3,502 2,016 1,168 4,972 2,156 1,662 1,386 6,231 2,668 1,861 1,603 5,333 2,664 1,778 1,561 5,628 2,676 1,993 1,415 6,811 2,578 2,426 1,503 4,856 Total Cropland 11,190 11,658 11,435 11,465 11,631 12,895 11,363 Source: Calculated and estimated on the basis of the United States Census of Agriculture. Minor deficiencies have been supplied from other sources. Land utilization for any given census year is representative of the previous year. » The eleven intensive field crops are : Corn harvested for grain, sorghums harvested for grain, flax, rice, beans, cultivated hay crops excluding grain hay, potatoes, cotton, sweet potatoes and yams, sugar beets, hops. 17] Increase in Irrigated Acreage Irrigation of California farm lands has accompanied the increase of intensive farming. The decade 1910-1920 saw an increase in irrigated acreage of 140 per cent, whereas in the decade 1935-1945 such an increase amounted to but 27 per cent. Much of the increased irrigation of the earlier period was of the highly intensive crops, such as orchards and vineyards, while the smaller recent increase has been primarily an expansion of field crops, also intensive, but not so much so as the expansion of orchards and vineyards during the earlier period. A study of selling prices of farm land in seven western states clearly points Table 5: SAMPLE COUNTIES OF SEVEN WESTERN STATES— AVERAGE SELLING PRICES PER ACRE OF RANGE LAND AND CULTIVATED LAND Selling price per acre Range land Cultivated land Year Dollars Per cent of 1941 price Non-irrigated Irrigated Dollars Per cent of 1941 price Dollars Per cent of 1941 price 1941 11 100 60 100 148 100 1942. 11 100 70 117 171 116 1943 15 136 88 147 243 164 1944 16 145 106 177 324 219 1945 21 191 112 187 386 261 1946 25 227 137 228 444 300 Source : Farm Real Estate Market Activity, United States Dept. of Agr. out the relationship of irrigation to selling price. Results of the study, tabu- lated below, show the large difference in market price between irrigated and non-irrigated lands, and also show the more rapid rise in market prices of irrigated lands compared with non-irrigated lands. In the early years of the period studied, irrigated land in the seven western states was valued by the buyers and sellers at about two and one-half times that of non-irrigated culti- vated land. During the last two years, when land values had more than doubled, the value of irrigated land had increased to three and one-half times that of non-irrigated land. Subdivision of Land Smaller farms increase in number with intensification of agriculture. They have an important effect upon the average price of farm land. Each of the smaller farms requires an individual set of buildings, wells, and all the other improvements. Spread over the smaller acreage the value of these improve- ments adds to the per-acre land value. For these and other reasons, small farms in general sell for higher prices per acre. [8} Table 6: CALIFORNIA FARMS— THE RELATION OF SIZE TO VALUE Class of farms by size Average size Average value Number of (acres) of farm (acres) per acre farms 3-9 5 $1,559 27,673 10-29 16 38 853 503 37,223 30-49 16,314 50-69 58 453 7,246 70-99 81 335 8,262 100-139 115 299 5,548 140-179 157 201 5,442 180-219 197 216 2,535 220-259 237 190 1,988 260-379 314 157 4,113 380-499 433 126 2,333 500-699 587 107 2,533 700-999 826 85 2,019 1,000-4,999 2,030 47 4,869 5,000-9,999 6,774 27 653 10,000 and over 24,835 18 417 Total number of farms 129,168 Source: United States Census of Agriculture 1945. The relation of size of California farms to their average 1946 value per acre is shown in table 6. Farms of three to nine acres averaged in value $1559 an acre; the per-acre value decreases as the size increases until farms in the 700- to-999 acre class were valued at $85 an acre, while farms of 10,000 acres aver- aged only $18 an acre. This development of the smaller farm was a trend of the first world war period, but not of the second war period. In the period 1910-1920 the percent- age of farms under 50 acres increased from 49 per cent to 56 per cent. During the decade 1935-1945 the percentage of farms under 50 acres, 66 per cent, did not change. Table 7: NUMBER OF FARMS BY SIZE IN CALIFORNIA 1910 1920 1935 1945 Size of farm Number of farms Per cent of all farms Number of farms Per cent of all farms Number of farms Per cent of all farms Number of farms Per cent of all farms Under 10 acres 10-49 acres 50-99 acres 100-499 acres 500-999 acres 1,000 acres and over. . 10,593 32,546 10,680 24,566 5,119 4,693 12) 37 12 28 3 .49 51 16,697 49,093 15,034 26,888 5,052 4,906 42 j 56 13] 23t 44 II 34,076 64,752 17,121 24,243 4,913 5,255 23 43, 11 16 I ^66 ^34 37,422 53,537 15,508 21,959 4,552 5,939 27 391 11 16 3 4 66 34 Source: Calculated from data in the United States Census of Agriculture, Dept. of Commerce. C9] AGRICULTURAL DEVELOPMENT AND FUTURE LAND VALUES In the foregoing pages it has been shown that in the 1920's there had been a rapid increase in the California acreage of intensive crops, a sharp rise in the proportion of those crops irrigated, and an increase in the proportion of small size farms. All of these resulted in a level of farm real estate values which was higher than earlier peace-time values and which had a certain degree of per- manence. Before 1930, expansion of orchards and vineyards had come to an abrupt stop, and increases in the expansion of intensive field crops had been checked. The proportion of the total cropland acreage irrigated increased thereafter at a greatly reduced rate, and the percentage of small farms in the total ceased to increase. Rates of development were somewhat increased again by World War II and may be a partial explanation of the more rapid rise of California land values compared with those of the United States. However, no such expansion took place as was characteristic of the 1920's. As we look forward to future land values, this difference in agricultural development in the two war periods is important. As a great and lasting influ- ence upon land values, agricultural development cannot be expected to be as important during the period immediately following World War II as it was in the corresponding years following World War I. The completion of the Central Valley Project may create such an influence, but at a later time. LONG PERIOD CHANGES IN FARM REAL ESTATE VALUES 250 200 150 UJ CD < en UJ u_ o I- z LJ U * 100 50 \ ^- Califo rnia j ^^mrn / V. "***— % v w f United States -" \ ,«•*■— .,** iiii >it* i 1915 1920 1925 1930 1935 1940 1945 £10} HOW DO PRICES RECEIVED BY FARMERS AFFECT LAND PRICES? Commodity Prices are basic in accounting for changes in farm land values. The relation between farm commodity prices and land values, however, is not precise. The reasons are complex but are about as follows: Gross Returns from farming are made up from commodity prices and the physical volume of production. A portion of gross returns is used to defray cash costs of production. (At the end of October 1947 gross marketings of California farm products were still increasing rapidly as shown in table 8). Costs of Production including wages and prices of materials and equipment which farmers buy, tend to lag behind the rise and fall of farm commodity prices. Costs often reach their peak after farm commodity prices begin to fall. In the later stages of a period of inflation and during price decline, therefore, costs of production tend to become a larger and larger proportion of gross returns. Net Farm Income is the remainder after cash costs of production are paid. It is the return to the farmer for his own labor and management, interest on his operating capital and payment for the use of his land. Net farm income temporarily becomes a greater-than-normal proportion of the gross return when farm commodity prices are rising. When farm commodity prices are declining, the opposite happens and net returns may be entirely eliminated. Net Land Income is the most important basis of farm land value. It is sel- dom measured statistically, however, except where land is rented. In the case of owner-operated farms, buyers and sellers can make only rough estimates of the portion of net farm income that can be considered as net income of the land and fixed improvements. That they do make some such estimate, however, is indicated by the fact that only a portion of the large net farm incomes of inflationary periods has been reflected in land prices. Other Factors tend to bring land prices into line with commodity prices. In times of high prices, money for the purchase of farms becomes plentiful from both agricultural and nonagricultural sources. The general purchasing power of money declines and farm land price trends tend to resemble those of commodity prices. However, buyers and sellers of farm real estate probably recognize the temporary character of extremely high and extremely low com- modity prices, and in the later stages of such extreme periods tend to become more conservative in real estate transactions. As a result average land prices, though following the same general trend, are inclined to be less variable over a period of time than are commodity prices. Farm land prices, thus, tend to be based more upon expected future returns than upon current abnormal com- modity prices. [11} SELLING PRICES OF LAND COMPARED WITH SELLING PRICES OF PRODUCTS (PER CENT OF THE 1935" I939AVERAGE) VINEYARD s - Commodity Price — ^ 1 1 1 II II ,", II 1 1 1 1 it 4 n ii f i f i i i i i i i i i i i i i ■ i i i #1 #1 / 1 / ^ j\ - ' X^Land Pric e 600 --500 400 CITRUS GROVES J/% f Land Pi ice -^^/ ZOO - ¥ \ J v< 1 A \ \ \ \j ioo- ^V y Z si ** ^Commodity r\ Price 935 1940 1945 300 200 100 DECIDUOU ORCHARD S A i i i 300" C commodity Pric< »-*