Will rising interest rates finally put a dent into the latest boom in land prices?
United States Department of Agriculture (USDA) data shows that farm real estate values climbed 12.4 percent from 2021 to 2022.
Gains were even higher in some key Midwestern production states last year, such as Iowa, +21.4 percent; Minnesota, +17.4 percent; and Illinois, +12.7 percent.
Last year’s statistics weren’t an irregularity, either. Since 2008, farmland prices nationwide are on average around 75 percent higher today and have only declined two years during that time, 2009 and 2016.
“Land is always a smart long-term investment to make,” said Jason Burbage, president of land brokerage firm National Land Realty.
However, 2023 could prove to be one of those one-off years where farmland values stabilize or even decline, Burbage said.
That’s because of complications arising from the current environment of high inflation and rising interest rates. But it’s even more complex than that.
“Urban buyers are definitely cooling off,” Burbage said.
Since the pandemic began in 2020, city dwellers began to flock to rural America in search of land for hunting and other recreational purposes. But higher interest rates are beginning to limit those would-be buyers.
Other outside buyers like to consider farmland purchases purely from an investment stance, said Tanner Ehmke, CoBank economist.
As interest rates rise, other assets, such as CDs and money markets, become more lucrative for those potential buyers.
“CDs and money markets are easier to handle, and you don’t have to deal with a tenant,” Ehmke said “There’s a relationship you have manage with tenants. It requires more attention, and you must consider how they are preserving the value of your asset.”
However, farmers appear to be more immune to the rising interest rate environment now, according to Burbage.
“Interest rates have not caused a dramatic shift in our market when it comes to farmland and timberland,” Burbage said. “Buyers don’t depend on loans as much for acquisition. We’re still seeing people spending a significant amount for tracts of land and paying cash. They’re pulling the trigger because they still have the funds.”
The other critical thing to consider is basic supply and demand fundamentals, Burbage said. “Demand is still there because there’s not a lot of inventory available.”
National Land Realty recently conducted its third annual land real estate agent and broker survey. Around two-thirds of respondents are predicting that land values will either level off or slightly decrease this year.
Ehmke has a similar opinion. “I think the ingredients are there for land values to plateau at a minimum,” he said.
Unfortunately, cash rent tends to be contradictory to farmland values, Ehmke said.
“Today’s rates are based on corn prices two years ago,” Ehmke said. “So, it doesn’t tend to correlate very well with land values from year to year. However, we’ll see a lot of rent negotiations next year if margins continue to erode.”
At the end of the day, farmers will have to stay focused on their production and other areas of influence, Burbage said.
“Unless something crazy happens, there’s no real point in doing anything but continuing with what you can control,” Ehmke analyzed.
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