Values of highly improved Delta land are appreciating rapidly and outside buyers are showing increasing interest because of tax exchange advantages and the ability to produce a wider range of crops. As a result of the Freedom to Farm program and IRS 1031 exchanges, investors in other parts of the country feel they can get a good buy for their dollar with Delta land while reducing their tax liabilities.
While investors seem to be primarily interested in larger, highly improved tracts, land values across the state appear to be experiencing good appreciation. Large tracts in the Delta that avoid production risks through leveling and irrigation appear to be doubling land appreciation compared to other areas of the state.
I recently conducted a Delta land sale study as part of the requirements for my accreditation with the American Society of Farm Managers and Rural Appraisers. I chose a 2,100-acre, highly improved, irrigated south Delta rice farm as the subject for my study and had to identify 15 sizable farms in the south Delta that met my study criteria for use as comparable sales.
Three interesting factors surfaced:
Larger improved Delta farms showed an annual appreciation rate of more than 15 percent over the past three years.
Changes in the 1996 farm bill directed at attaining farm legislation that was more market-based and market-oriented resulted in increased interest in land situated in the Mississippi Delta, particularly since the value of grain crops has escalated.
The development of a 1986 section of the IRS code allowed investors who wanted to sell property to make an exchange for like property and avoid a capital gains tax.
Prior to the Freedom to Farm program, farmers were under a quota system. If the producer complied with these quotas he was eligible for a subsidized price for his commodities. For instance, if he had a cotton base he could plant 85 percent of his base. As a result of compliance, he received subsidies to make him competitive with world prices through a “target price” mechanism.
Farmers did not like this dependence on the government and the public did not like producers drawing subsidies from the government.
As the Freedom to Farm program evolved, it allowed producers to collect some income from their program crops, but it also allowed them to grow the crop that presented the most opportunity for profit. The base of the agricultural economy in the Delta was King Cotton.
During this time there was not much change in the market for cotton or grains and the Delta continued to grow cotton. To farmers outside the Delta, cotton was a new crop. Cotton production required sizable investments in variable costs and the fixed cost.
Moving into the current decade we began to experience increasing energy costs. There is interest in grains as bio-fuel. Prices for grain started to increase. There was also an influence in the agricultural markets from speculators.
My study confirms that with alternatives to cotton production and grain crop values increasing, more outside investors are beginning to look at the strategy of investing in Delta land. In areas outside Mississippi, where land prices are under the influence of urban sprawl and appreciating at rapid rates, people who are selling their land view the Delta as an opportunity for investment.
Capital gains taxes were a significant tax liability to persons experiencing urban sprawl. The IRS 1031 section allowed the landowner to exchange property for similar investment property with greatly reduced influence of capital gains tax. For example, an owner might sell 40 acres in the path of urban sprawl that would allow him to purchase 10 times that many acres in the Delta and avoid capital gains taxes during the transaction.
In my study, it appeared that buyers were taking advantage of the 1031 exchange and seeking highly improved properties, including precision-leveled and irrigated land. This reduced the risk of producing a marketable crop each year. I believe this financial maneuvering to avoid taxes had an effect on the land market in the Delta though no definitive value for its effect could be determined.
Pepper, a retired Extension Service agent with over 30 years of agricultural experience, is an Accredited Rural Appraiser, the highest level of accreditation offered through the American Society of Farm Managers and Rural Appraisers.