Current Status of Midwestern Farmland Values
Farmland values throughout the United States have been on the rise during the past year, piquing the interest of farmers and institutional investors alike. The Federal Reserve Bank of Chicago estimates Midwest farmland values are up 23% in the first quarter of 2022 compared to the same time a year ago.
The highest increase in values came from land rated as “good” or “excellent”, with more modest gains for land rated as “average” or “fair.” Land that would have sold for $12,000/acre a year ago is now selling for $18,000 – $19,000 in the Midwest. This large year-over-year growth has been a topic of conversation for farmers at the local coffee shop and investors in the board room.
Selloffs in the U.S. stock market due to economic concerns have caused market index values like the S&P500, NASDAQ, and Dow Jones to significantly drop year-to-date. Investors seeking protection from stock market losses are looking for real assets such as farmland to invest in. The strong interest in farmland is only continuing to drive prices upward with little end in sight.
Change in Farmland Price by State
Drivers of Farmland Values
Rising inflation, strong commodity prices, and overall curiosity in the industry have all impacted the price of farmland. Commodity prices have bolstered farm incomes and crop prices are up 22%, furthering the upward trend in farmland prices. There are a variety of factors impacting commodity prices such as supply chain issues, demand for energy, and the uncertainty around the Russian and Ukrainian conflict.
Historically, commodity prices and farmland prices have been linked primarily to farm incomes. And as farm income rises, typically so does the price of farmland. According to the USDA, farm incomes are projected to be above average in 2022, falling slightly from high farm incomes in 2021 signaling continued strong land prices for 2022. The balance sheet and projected income statement for farmers who are the owner and operators of land are improving with rising farmland prices and farm income. Strong farm income and balance sheets are good news for farmers, but it is also good news for landowners who are getting to reap these benefits as cash rental rates are up 11% in the Midwest year-over-year. Strong land values lead to higher prices paid for cash rent which is making a stronger case for U.S. farmland for prospective landowners. These benefits are only furthering the interest and demand for quality farmland purchases, causing prices to rise even more.
Another factor impacting farmland values is the cost of financing. While the federal reserve has been raising interest rates in recent months to combat inflation, the U.S. is still experiencing a relatively low-interest-rate environment when compared to historical levels. The U.S. prime rate is currently at 4.75% and when examining the 50-year history of interest rates (see graph below), it is still one of the lowest points on the graph. Low costs of capital have made investments in capital-intensive sectors such as farmland more attractive for investors and farmers alike. Notorious investors such as Elon Musk, Warren Buffet, and Jim Cramer have all recently cited the attractiveness of farmland as a real asset and low-interest rates have made an even stronger case for U.S. Farmland.
U.S. Bank Prime Loan Rate
How Far Will It Go?
The buzz surrounding farmland values has people questioning how long this period of high land prices will last and if we have seen the peak in values already. The answer to that question will depend on several factors such as commodity prices, interest rate changes, and inflationary levels. Gary Schnitkey, professor and researcher at the University of Illinois, told Progressive Farmer that he expects land values to remain strong throughout the next year and that we have yet to hit a high in prices yet. He cites that commodity futures prices for 2022 and 2023 are strong, signaling strong future farm returns. Indicators such as this have some farmers racing to grow acres under management to capture the strong income potential. While right now is a time of prosperity for U.S. farmers, history has taught us that it can change in an instant. Farmers should be wary of making major long-term decisions based on current short-term market conditions. When deciding whether to spend $18,000 per acre on a farm, farmers need to also look at the downside risk if commodity prices were to fall or interest rates were to rise. Effective risk management and planning must guide purchasing decisions to ensure the long-term stability of a farm.
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