A common question at my speaking events has been, “Why have rising interest rates not impacted land values similar to the 1980s decline?” This is a very important question and element in the agriculture industry because land values nationwide make up over 80 percent of the farm and ranch balance sheet.

Now, back to the question at hand. In the past few years, farm interest rates have increased the fastest since the 1980s farm crisis years. Granted, they have not soared to the levels of 20 percent seen in the decade of the 1980s. However, increasing from a two to three percent interest rate to an interest rate of seven to eight percent has a very similar economic and psychological impact.

Mini super cycle

Agriculture producers, particularly above average producers, are coming off a three-year mini super cycle. Initially, prices received shot up before costs and interest rates, allowing proactive managers to garnish record profits. Next, supply chain issues put a lid on capital purchases of machinery and facilities, resulting in a stockpiling of working capital and liquidity. Also, lush government payments that came with zero cost of production were “table money” for this generation of producers looking for a place to invest. These three components combined to channel land investments using cash or leveraging high equity positions with minimal financial leverage, creating local bidding wars.

1980's didn't mean financial liquidity for producers

Another overlooked element is just pure demographics. In the 1980s, many of the borrowers and landowners were young baby boomers acquiring farms and ranches from their parents and grandparents of the Great Depression and World War II. When interest rates spiked, these baby boomer farmers were in the early stages of their business operations, which can mean large amounts of financial leverage. The higher interest rates suffocated profits. Many of these producers had very little financial liquidity which required them to place land on the market when the supply exceeded demand, resulting in discounted prices.

Fast-forward to today, the baby boomer producers who survived are benefiting from years of equity growth through land appreciation and, in some cases, earned net worth. Many have stockpiled working capital and have prudent financial and business practices, along with crop and other insurances, which gives a level of comfort to the profit picture. Compounding this with the baby boomer farmers and investors purchasing land for business continuity for the next generation leads to continued strength in the land market.

What is around the corner?

Given this situation, land values could soften and decline in some regions or areas of the country if a confluence of events were to occur. First, a prolonged downturn in commodity prices, both crop and livestock production, with elevated costs and interest rates could be one of the culprits. Next, the fragmentation of farms could occur as nonfarm children cash in on their inheritance, creating a supply and demand imbalance in certain areas of the country.

The opinions of David Kohl are not necessarily those of Farm Progress.