The “wealth effect” is a fascinating consumer behavior phenomenon. It refers to the idea that when households perceive their net worth to increase (via assets such as stocks or real estate), they feel “richer” and thus feel they can spend more than they otherwise would. 

Many Americans who own stocks are generally feeling pretty good about their finances, and as a result are spending more. According to data from the Federal Reserve, Americans have gained more than a whopping $63 trillion in wealth due to increases in stock values from the first quarter of 2020 through the second quarter of 2025. Gains in the top 30 artificial intelligence-related stocks have added $5 trillion to household wealth in the past year alone! Notably, the top 20% of earners own about 87% of all stocks and mutual funds. 

To look at it another way, wealth from stocks and mutual funds went up 127% during that period. Compare that to real estate wealth, which rose more than 61% during that span. Farm real estate values during the same period didn’t do too badly either. Depending on where the real estate is located, values may have risen well north of 50%. 

So, what does all this market appreciation have to do with increased spending? 

First, there is a difference between “paper wealth” and “realized wealth.” The former is simply rising asset values, such as home values, retirement account balances or business valuations. It’s like waving a magic wand over your financial statement. The latter is wealth earned through cash flow or profit – good old “earned net worth.” 

Economists have found that people increase their spending as they gain wealth. Studies vary, but research by Oxford Economics found that consumers spend as much as $140 more than they otherwise would for every $1,000 change in their financial wealth. 

There is nothing wrong with benefitting from increases in asset values. That’s why most people take risks and invest. The challenge is to keep the right perspective and not let yourself fall into spending habits that can’t be reined in if or when those asset values decline. 

There are several pressures or headwinds that may affect or trigger a negative wealth effect. Certainly, equity market volatility is one – especially with a market driven by technology stocks. Higher interest rates, which may constrict real estate activity, along with rising consumer debt are also factors that could cause contraction. 

The Wealth Effect on Farmers and Ranchers 

When talking about asset appreciation or paper wealth in agriculture, it’s almost always in reference to farmland values. Most producers’ assets and net worth are tied to farmland values – around 80%, according to some estimates. Furthermore, it’s estimated that on average, about 65% of a farmer’s net worth is tied to farmland values appreciating. 

Farm and ranch households certainly aren’t immune to the psychological effect of spending more as a result of feeling richer, although it’s probably considerably less than in the general population, perhaps an increase more like $3 or $4 per $1,000. 

Instead, when ag producers benefit from asset appreciation, they often make additional investments into the farm or ranch. For example, they may look to upgrade their equipment or facilities, or make land purchases. 

Agriculture may be entering an environment where paper wealth remains high, but cash flow is tight. Producers may feel stable because land values are strong, but they’re acting more cautious because of an uncertain environment and working capital or liquidity levels that are tightening. Reduced working capital creates a “real-time wealth effect,” changing behavior month to month, not year to year. 

But what about a decline in paper wealth? When that goes down, does spending also decline? In most cases, yes, but research shows that spending does not fall as quickly as a decline in wealth. In other words, people are slower to cut back when the market goes down than expand when the market goes up. 

The reality is it’s hard to change discretionary spending habits when economic headwinds come blowing in. As one colleague told me years ago, family living or spending habits are a bit like concrete – once it sets, it’s pretty hard to change. 

For agricultural producers, the major downside of declining asset appreciation is in reduced borrowing and investing capacity – not necessarily day-to-day household consumption or consumer spending. A 10% reduction in land values, for example, may reduce capital expenditures or expansions by 40%-50%. 

A general rule of thumb is that every $1 of farmland equity equates to about $0.50 of borrowing capacity. Clearly, there are other factors that go into a loan decision than just collateral, but for many lenders, equity in farmland helps bridge the inevitable downturns in agriculture. 

The bottom line is this: The wealth effect – spending more when assets appreciate – is real. But it’s more prevalent in the general population than it is in the farm community. 

It’s always good to have an accurate financial statement that reflects the true market values of your assets. But don’t forget about your “earned net worth or equity” – removing asset appreciation (or decreases in asset values) and focusing on cash flow and profitability from operations. Appreciated assets alone won’t pay the bills – unless, of course, they’re sold and turned into cash. But then you have to pay the tax man… 

Quick Hitter Ag Updates 

• On December 8, President Trump announced a $12 billion “bridge payment” aid package for farmers. Commodity-specific payment rates were expected to be released at the end of December, with payments to producers expected toward the end of February. We’ll discuss this further in the next issue of AgViews.
• The ag economy continues to be bifurcated, with livestock producers – especially cow/calf producers – doing quite well while grain producers face challenges. Some cow/calf producers are seeing checks for this year’s calves at generational highs. Good for them – it’s their turn, and they deserve it.
• A friend of mine, Doug Johnson, said it best with respect to differences in the grain and livestock outlook: Both grain and livestock producers may be drinking whiskey, but for entirely different reasons.
• Some cattle producers are struggling with the idea of President Trump being a friend to American cattle in light of November’s announcement that he’s quadrupling Argentinian beef imports.
• Grain producers are also confused by the recently announced $20 billion bailout of Argentina, which is a major export competitor. Immediately following the announcement of the U.S. bailout, Argentina sold 20 shiploads of soybeans to China.
• Given the headwinds in the grain sector, I keep expecting land values to moderate or even decline slightly, as there seems to be less and less short-term optimism on the future ag outlook. But so far, based on early fall land sales, we’re seeing little to no softening in values. We’ll see what the winter brings, but for now, values are very firm. We’ll take a deeper dive into land price outlook in the next AgViews newsletter.
• Overall, it was a good crop, with yields generally average or slightly above average. It remains to be seen if above-average yields can offset lower-than-expected commodity prices and move the profitability needle into the black.
• From a crop marketing perspective, there weren’t a lot of crops marketed or sold before harvest. Most crops are in the bin waiting for better prices. Producers need to keep in mind the financial cost of holding inventory.
• It appears that the used equipment market may have found a bottom and has strengthened in some areas. There isn’t much new equipment being purchased.
• Trade deals continue to be highly fluid. A deal with China? Maybe, but as I’ve said for the past few years, don’t bet the farm on China. Their track record of following through on trade deals leaves something to be desired. The reality is they will likely need U.S. soybeans in January and February until the Global South is ready for harvest.
• Global trade and trade deals seem to be increasingly transactional, rather than relationship-based. As a result, many deals come down to overall cost and prices.
   

This article appeared in the Q4 2025 issue of our AgViews newsletter.