January 5, 2023
The land market momentum that began in 2021 continued to accelerate last year. Experts say the market will remain strong in 2023 – even with spiking interest rates.
Farmland auctions set new record highs in several states in 2022. In fact, land sale prices increased 20-34% year-over-year across the Corn Belt according to the Kansas City Federal Reserve.
“There are simply more buyers willing to bid on the limited amount of land coming to the market,” says Paul Schadegg, senior vice president of real estate operations for Farmers National Company. Schadegg expects values to remain strong in the new year with the strong ag economy, but we may see fewer record sales.
Prices on the rise
The U.S. Department of Agriculture reports cropland values rose 14.3% in 2022 to a nationwide average of $5,050 per acre. Farm real estate and pastureland also increased by 12.4% and 11.5% respectively.
The Northern Plains saw the biggest increase in cropland value, coming in at just under 20% higher than 2021. Kansas topped the list with a 24.5% increase in cropland value overall, and a 26.7% increase in irrigated cropland.
On the other hand, the Northeast, Pacific, Mountain, Southeast, and Delta State regions all saw increases under 10%. No regions or individual states showed a decrease in the value of farm real estate, cropland, or pastureland.
Despite smaller hikes in land value last year, California and New Jersey still see cropland values averaging over $15,000 per acre, the highest in the country.
Fed interest rate hikes
Just as land values rose, the Fed issued a series of seven aggressive interest rate hikes in an effort to curb inflation. Overall, the federal funds target range jumped 4.25% in 2022.
“The Federal Reserve seems to be determined to keep raising interest rates until they get a firm control on inflation,” says Wendong Zhang, an associate professor of economics at Iowa State. He notes that while higher interest rates put downward pressure on the land market, we might not see those effects in land prices for one or two years.
Bear in mind that higher interest rates don’t always affect farmers’ decisions to purchase more land. For example, Zhang says 81% of Iowa farmland is paid for, and Schadegg explains the majority of land purchases are being made with cash.
In addition, high inflation makes the real interest rates negative or low, which tends to incentivize more borrowing and investment. High commodity prices and equipment shortages in 2022 may mean more farmers are looking for a way to spend.
Interest rates have had minimal effect on the land market so far, but there will come a point when the combination of interest rates, inflation and a potential downturn in commodity markets will have a negative effect on land values.
Buyers and sellers
Strong demand continues to provide opportunities for landowners interested in capitalizing on the hot land market.
Farmers National Company reports a record sales volume of $766 million in 2022. The majority of sales came through online and public auctions, and there was an increase in both acres sold and the total number of farm sales.
The majority of land sales the company has seen stem from non-operating landowners selling to split family interests. Schadegg explains a very small portion are retiring farmers or active farmers wanting to get out of land ownership.
Active farm operators are the buyers of farmland 75% of the time. “Many have the intent to expand their current operations or may adjoin the land for sale,” Schadegg says. “Motivation comes from the need to expand or realizing that the land may never come up for sale again in their lifetime.”
Still, investors are an important part of the equation. Land investors are active bidders at most sales and help set the floor on values. Even if they are not the buyer, their competition is driving prices higher.
“We expect this trend to continue as many investors see the long-term value of farmland, the opportunity to diversify investments, and the value of land as a hedge against rising inflation,” Schadegg says.
Factors to watch in 2023
So, where is the land market headed this year? It’s impossible to say with certainty. A range of factors have the potential to drive the land market or slow its growth.
While inflation was a driving factor in land value hikes in 2021, commodity prices were the leading factor in 2022. If high commodity prices continue to fuel strong net farm income in 2023, extra cash on hand will continue to support high land values. Strong yields and a positive farm economy will also prop up land values.
For those hoping for a downturn in land prices, the possibility remains. Federal Reserve Chair Jerome Powell projects the Fed will deliver more interest rate hikes and subsequently raise the interest rate above 5% in 2023.
Inflation is still a major factor behind high input costs for farmers. Higher interest and bigger bills will decrease net farm income, limit equity and ultimately pressure farmland value lower.
“We sit at a somewhat precarious point in time where opportunity exists for both land sellers and buyers, but is dependent on the continued strength of the agriculture economy to stabilize or grow,” explains Schadegg.
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