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Foreign ownership of American agricultural land.

Foreign Ownership of American Agricultural Land

The so-called problem of foreign ownership of U.S. farmland has stirred controversy among Americans, particular those employed in agriculture. This perceived problem has stimulated public alarm and prompted proposed congressional and state legislation aimed at restricting or even prohibiting such foreign ownership.

American farmers see this "invasion" as a problem with potential major ramifications. They complain that foreigners are driving up the price of farmland. This price escalation may heighten the entry barrier for young American farmers. Also, many feel that foreign money pouring into the U.S. agricultural sector threatens the sanctity of the family farm (Fry, 1980). In summary, the perceived problem is that foreign ownership of U.S. farmland heightens she overall competition in an economic sector in which individual producers already have little control over the selling price of their output.

Foreign owners of U.S. agricultural land are required by law to report to the U.S. Secretary of Agriculture. This law (AFIDA, 1978) further requires requires an annual report by the secretary concerning the status of foreign owners. (Parcels of land of not more than ten acres which yeild less than $1,000 in gross annual sales are exempt from this law.) Thus, figures compiled annually reveal the total U.S. agricultural acreage that is currently foreign owned.

The controversy over foreign ownership of U.S. agricultural lands warrants a closer look. Our objective is to investigate the following questions: Is foreign ownership of U.S. land a problem, and to what degree? What about Montana? What is the likely future trend? What are the pros and cons for foreigners purchasing American turf?

The National

Picture

A closer look at foreign land ownership statistics reveals that only a very small proportion of U.S. agricultural land is foreign owned. At year-end 1987, the foreign direct investment position in agricultural land was 12,534, 972 acres (USDA, 1988). This amounts to 0.97 percent of all privately held agricultural land. (Privately held land is total land less public, Indian, transportation, and urban land.) To put these numbers into perspective, combined foreign-owned U.S. farmland acreage would cover an area slightly less than one-fourth the size of Montana.

Who owns this land? European investors held almost two-thirds of the 12.5 million acres owned by foreigners at the end of 1987 (figure 1). British investors held the largest portion with 30.3 percent. Residents of the Netherlands owned 10 percent. Investors from all other European countries combined owned 22.4 percent, while Canadians held 19.9 percent (USDA, 1988). Despite all the publicity aimed at Japanese investment in the U.S. agricultural sector, the Japanese share of the total foreign-owned acres was only 1.2 percent.

The evidence does not support the popular perception that Japan, with is massive trade surplus with the United States, is a large owner of U.S. farmland. Japan ranks behind nine countries in the number of U.S. agricultural acres owned by foreigners. The evidence also does not support the popular perception that a large percentage of American farmlan is foreign owned. In fact, USDA data show that states like Iowa, Indiana, Illinois, and the Dakotas have the lowest proportion of foreign-owned agricultural land.

The Montana

Situation

How does Montana compare? In 1987, foreigners owned 442,484 acres in Montana (table 1). This amounts to 0.8 percent of the total privately owned land in the state, and represents a slightly smaller proportion than the national figure. Canadians are the dominant foreign owners in Montana, with 166,978 acres (38 percent of the foreign-owned land), followed by the Dutch with 50,906 acres (11.5 percent), and finally West Germans with 19,470 acres (4.4 percent). All other foreigners combined own 205,105 acres (46.4 percent). Pasture, with 342,391 acres, is the major use of foreign-owed Montana land. The second most frequent use is cropland, with 63,701 acres.

Montana counties that have the most foreign-owned cropland acres are Rosebud (11,111 acres), Toole (11,004 acres), Cascade (9,265 acres), and Gallatin (4,600 acres). Foreign ownership of pastureland in Montana is concentrated in Rosebud (188,826 acres), Big Horn (45,558 acres) and Wheatland (24,676 acres) counties.

Advantages and

Disadvantages to

Foreigners

While the proportion of foreign-owned U.S. agricultural land is small, the total area of over 12.5 million acres is a sizable chunk of land. Why do foreigners choose to invest in our farmland?

By comparison with most foreign countries, the United States is massive in size and the most affluent market in the world. Owners of wealth prefer to invest in capitalistic (private ownership) institutions. Probably the most important comparative advantage in favor of investing in the United States is the stability of America's economic system.

To obtain a sense of perspective, let's compare Japan with Montana. Japan is approximately the size of Montana in terms of total square miles of land area. However, Japan has about 150 times the population compared to Montana. Due to relative population density, land ownership is at a premium in Japan.

A major economic incentive for foreign purchases of U.S. farm, ranch, and timber land, compared to alternative investments, is relative price. Our land is cheap compared to land in Japan or Western Europe. For example, in January 1980, the currency exchange ratio of the Japanese yen per U.S. dollar was 259. In November 1988, this same ratio was 134. One thousand U.S. acres priced at $500,000 in 1980 would have cost a Japanese investor 129.5 million yen. In 1988, these 1,000 acres would have cost only 67 million yen (International Financial Statistics, 1988). This means that the price of U.S. land, in terms of the Japanese yen, decreased 48 percent. Adding severity to these relative price difference has been the price reduction of U.S. farmland. In 1982, the average value of farm and ranchland in Montana was $230 per acre. In 1987, this same acre had $ 167 of value (USDA Chartbook, 1988). This indicates a 38 percent decline in the purchase price of land in addition to the decline in relative prices due to changes in the currency exchange ratio.

Comparing U.S. and foreign comparative tax burdens shows a mixed picture. The income and Social Security tax burden borne by the average American worker is about 20 percent of gross earnings. Residents of Denmark, Sweden, and the Netherlands pay about 35 percent. Those in West Germany and the United Kingdom pay about 28 percent. The French, Canadians, and Japanese pay about 12 percent (OECD, 1983). For its relative affluence, U.S. workers appear to have a relatively moderate tax burden.

An additional incentive in investing in U.S. farm and ranch operations is that foreign marketers and processors can assure supplies of product that fit American tastes and preferences. Frequently, foreign products differ from U.S. consumers' tastes and preferences.

Intangible benefit may also contribute to foreign purchases of U.S. land (Fry, 1983). Investment in the United States may provide access to our agricultural technology. There have been many technological changes in U.S. agriculture over the past two decades, and foreigners realize U.S. farmers can produce more economically. Finally, some foreign investors may be attracted to land purchases because of perceived prestige and what economists call the "psychic" value derived from being a "capitalist" in the United States.

While there are many advantages for foreigners to own U.S. agricultural land, they are offset by several disadvantages. The small overall proportion of foreign-owned land may indicated that the disadvantages are serious.

Foreign purchase of American farmland might be viewed as a risky investment, with good reason. First of all, data from 1980 through 1988 indicate that U.S. farmland values have declined by over 40 percent (Ronald Reagan, 1989). Conventional wisdom suggesting that farmland maintains relatively stable prices and tends to be a hedge against inflation is no longer appropriate. Expectations for long-run land appreciation in real terms no longer appear warranted for rural land.

Perhaps the primary economic deterrent to foreign purchases in U.S. farmland is relative profitability. The expectation for profits from farmland investments does not appear to be competitive with alternative investment opportunities available to foreigners. From 1950 to 1969, the average per-year return to farmers' equity was 3.81 percent. The recent agricultural "boom and bust" cycle began in the early 1970s. During that decade, the per-year return to equity was 10.41 percent. For the first half of the 1980s, the average return on farmers' equity was a blead -7.08 percent (calomiris et al., 1986). furthermore, there is no doubt that the last half of the 1980s will also yield a negative return to equity (Ronald Reagan, 1989). If the long-run rate of return to farming is about 5 percent (Luttrell, 1979), why do U.S. farmers continue investing in farmland? Many have suggested that nonmonetary benefits such as a place to live, self employment, lifestyle, and a source of employment offset the relatively low rate of return to U.S. farmers (Boehlje and Eidman, 1984). However, this family-farm, owner-operated explanation does not apply to foreign purchasers of farm real estate.

The U.S. economy has a relatively high degree of government intervention in the agricultural sector. The United States has a tradition of attempting to manipulate, and, frequently, outright fix, market prices for agricultural output. In this way, U.S. taxpayers' income is redistributed to farmers, which encourages farmers to increase output. This, in turn, dampens food prices. In 1987, the direct federal budget costs associated with agricultural programs were about $700 for every nonfarm family in the United States (Owens, 1987). Foreigners may view the American "cheap food" policy as an entry barrier that does not exist in other sectors of the U.S. economy.

Additional disadvantages for foreign investors in U.S. farmland are:

(1) relatively high volatility of farm income, (2) relatively high degree of risk due to farmers' inability to influence market prices, and (3) extreme illiquidity of farm real estate. Potential farmland investors view the "land-rich, money-poor" phenomenon as a disincentive to enter this sector of the U.S. economy.

Conclusions

The U.S agricultural commnunity frequently expresses concern about foreign ownership of agricultural land. However, these concerns tend to be general rather than specific. This suspicion may simply be fear of the unknown. The general thrust of the perceived danger is that the United States will somehow lose control of its important basic source of food, and thereby lose control of its economic destiny and freedom.

We find no evidence that foreign investment in United States or Montana agricultural land has influenced the economy. Concerns about foreign agricultural land ownership do not have a factual base, either for the nation, the region, or Montana. Furthermore, such foreign investment does not appear to be a problem, nor do we view it as a potential problem. Currently, foreigners own less than 1 percent of available private U.S. farmland and less than 1 percent of private Montana agricultural land. One might conclude that foreigners view the disadvantages of purchasing U.S. agricultural land to more than offset the advantages. Foreigners and U.S. farmers have the same economic incentives to manage their U.S. holdings efficiently and for a profit. Investments in the United States or elsewhere mawy be more lucrative in areas other than the agricultural sector. Perhaps the second most important disadvantage is the illiquidity and inflexibility that is a consequence from owning farmland.

Finally, if foreigners did use their U.S. holdings in a detrimental way, federal and state legislation could counteract such activity. However, it seems unlikely that foreign investors would be able to, or would even want to, use agricultural land in ways that would be detrimental to the nation or to the agricultural community.

Cliff P. Dobitz is professor of economics and Donald R. Kirby is associate professor of animal and range science at North Dakota State University, Fargo.
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Author:Dobitz, Cliff P.; Kirby, Donald R.
Publication:Montana Business Quarterly
Date:Jun 22, 1989
Words:2013
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