Not too long ago, I laid out my thoughts on how I determine whether or not farmland is in an inflationary bubble set to deflate. I still don’t believe farmland is experiencing a financial bubble — but have prices peaked?

Every year, the Illinois Society of Professional Farm Managers and Rural Appraisers supplements its annual Land Values and Lease Trends Report with a midyear survey released at the Farm Progress Show in late August. This year, the results were reported in Boone, Iowa, by Luke Worrell, chair of the annual program, and University of Illinois professor Gary Schnitkey.

The survey this year indicates that farmland prices rose by 18% in the first half of the year, continuing the strong market we saw in late 2021. However, participants do not expect as large of an increase for the latter half of 2022, with a majority thinking prices will plateau. Surveyed members of the society believe cash rents will continue to rise as well as interest rates.

“Generally speaking, we’re starting to see the market soften a little bit,” says Nick Westgerdes, farm manager with Farmers National Co., Rochelle, Ill. “There have been some no-sales in the area, but there is still money out there, with local competition and investor-buyers still looking for ground.”

Westgerdes says the big question lies around fertilizer prices, noting that while nitrogen has come down a little, phosphorus and potassium are still running strong.

He’s got a point. Higher commodity prices have provided farmers with strong incomes. But how much of that margin will be squeezed going into next year? And subsequently, how will that affect the land market? Ultimately, farmland’s value derives from the revenue it generates. Lower profits point to lower values.

Paid to borrow money

Avery Schrock, Farm Credit Illinois, Decatur, Ill., says it may depend on how much land comes onto market this season.

“Even though interest rates are rising, as long as they are under the rate of inflation, there is incentive to borrow money,” he says, referencing the period this past summer when real interest rates for mortgages became negative.

That means when you subtract the rate of inflation from stated or nominal interest rate, the real cost to borrow money was negative. Or in other words: due to inflation, the money you get at the beginning of a loan is worth more than the money you get when it is paid back, even when interest is included. So from a strictly economic perspective, banks are now paying you to borrow their money to buy land. This is something we have not seen in the market since the ’70s.

“Balance sheets are looking better than they have been, working capital looks strong, and equity is good.” Schrock says.

This cautiously optimistic sentiment mirrors Purdue University’s Ag Economy Barometer September report. A positive outlook heading into harvest is always a plus for the land market.

Investors and the market

I recently spoke with an acquisitions officer for a large institutional investment firm who asked not to be named. They report that interest is strong for land in the institutional market. Good ground is selling well but may be on the market a little longer than it once was.

They also said there is strong interest in permanent crop investments, where cash returns run higher than row crop ones. Row crops have less “glitter” than permanent crops, which are a little more attractive because they can offer scale, organic certification or supplemental income from renewable energy sources.

They also indicate there are still large properties to be had in the Delta region, but at a lower volume. Surprisingly, the California market is strong despite water shortages, withering heat and drought. Properties with secure water rights are obviously more valuable — to the point that properties without water rights don’t sell.

So, while we may not be on a bubble waiting to burst, it does look like land values may pause at this level for a while, given the mixed signals we’re seeing.

Lauher owns Rolling Acres Ag Solutions and is a member of the Illinois Society of Professional Farm Managers and Rural Appraisers. Email questions to [email protected]. The opinions of this writer are not necessarily those of Farm Progress/Informa.