Mercaris launches new initiative to see if organic farmland can support higher real estate values 

By Jessie Bovay, Mercaris director of business development

United States farmland is a major asset class and its value is important for various players along the agriculture supply chain. Both public and private institutions have conducted extensive research into the financial value of farmland in general; however, very little work has been focused on the value of USDA certified organic farmland. While early university studies^[1] have demonstrated, on a limited basis, that organic farmland has a higher market value, more extensive analysis has not been undertaken nor shared with the sector in a way that enables organizations, farmers, banks and others to make meaningful decisions.

Mercaris has embarked on a new initiative, Mercoterra, to test the theory that organic farmland can support higher real estate values than comparable, conventional farmland. USDA’s Economic Research Service (ERS) reports that although overall growth in farm real estate values has been relatively flat since 2014, many regions continue to experience year-over-year increases. This research, based on macroeconomic and parcel-specific findings, has shown that the growth in land values recorded since 2000 can be attributed to general economic factors in addition to expected farm earnings[2].

For organic farmland, expected farm earnings can far surpass comparable conventional farmland earnings due to the premium price that organic crops command, rising demand for organic food and fiber, and the barriers to entry for organic farming. The significant costs involved in transitioning from conventional farming to certified organic farming are a major constraint on the supply of organic farmland, creating scarcity across the United States.  From the three-year transition period to learning organic farming practices to hiring an organic certifier—the up-front costs of transitioning are significant.  Still, these significant costs are broadly met with positive net effects; Mercaris data shows that that certified organic row crops generally receive a premium of 1.5 to 4 times conventional prices, making transitioning attractive. Furthermore, consumer demand for these organic foods continues to grow. The Organic Trade Association reported that organic sales in the United States totaled a record-breaking $49.4 billion in 2017, up 6.4 percent year over year[3].

Establishing a knowledge base that differentiates certified organic farmland values has numerous applications.  Moreover, having a comprehensive understanding of the entire value proposition of organic farmland is essential for informed decision making from farmers to financial analysts.

Source: Mercaris

For more information, visit: www.mercaris.com

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^[1] Janzen, J.P. and K.B. Fuller. “The Price of Farmland: Does Organic Certification Matter?,” NC-1177 Annual Meeting, Denver, CO, October 4, 2016

[2] https://www.ers.usda.gov/topics/farm-economy/land-use-land-value-tenure/farmland-value/

[3][3] Organic Trade Association’s 2018 Organic Industry Survey Conducted 1/25/2018-3/26/2018