Economic theory posits that land values are derived mainly from expectations about the future stream of income generated by its most profitable use, with consistently higher incomes leading to higher land values. However, farm income trends do not always move in the same direction as farmland values. Although farm incomes and farmland values were once closely linked, in recent decades, the relationship has become less clear at the national level. Many factors not directly related to agricultural production help account for the weakening link between farm income and farmland values. For example, in areas close to urban centers, the value of farmland reflects the returns it could earn from being developed for housing or commercial use when those returns exceed those for agricultural use alone. Even in relatively remote areas heavily dominated by agriculture, nonagricultural factors, such as income from hunting leases, may push farmland values higher than could be justified from farming alone. In addition, a substantial number of farm operators--about 1.2 million of the Nation's 2 million principal farm operators--do not engage in farming as their primary occupation (for example, operators can meet the minimum criteria for being considered a farm--generating $1,000 in sales of agricultural products in a typical year--by grazing cattle and selling some each year. Low levels of farming activity can leave time for working off-farm jobs). While this group of operators controls a significant amount of farmland, it does not generate much income from farming, on average. For these farm operators, owning and living on a farm may have less to do with the economic returns to the farm business than with the lifestyle and recreational benefits farmland provides.

Comparisons of rent-to-value (RTV) ratios demonstrate changes in the value of land relative to farm income. At a national level, average rent-to-value ratios--calculated as the average cash rent per acre divided by the average per acre value of land--have been decreasing over the past 45 years. Decreasing RTV ratios are consistent with the growing importance of nonagricultural factors in determining land values that may not be reflected in rents. Over the last decade, declining RTV ratios have occurred in every region of the country, though in some regions the changes are larger or more variable than in others.

The rapid rise in farmland values over the last decade and the influence of nonagricultural factors on land values raise two critical questions for farmers. For the 800,000 farm operators that continue to depend on farming for their livelihood, is farmland still affordable? And how vulnerable are farmland values to unexpected changes in interest rates and the residential housing market, both of which have experienced significant changes in the last 10 years?