The rapid growth in the average price of farmland has hit a roadblock this year and shows no signs of picking up pace anytime soon. Farmers National, a leading farm-management firm, highlights the impact of rising lending rates and falling crop prices on the agricultural real estate market.
According to Paul Schadegg, Senior Vice President of Real Estate Operations at Farmers National, farmland values have reached an all-time high. However, starting in the fourth quarter of 2022, the housing market’s slower pace began to influence farmland prices. Both property sales volume and values experienced declines in their growth rates, as revealed in a recent report by the firm.
For instance, Illinois currently boasts the highest average cost for farmland at $16,000 per acre, based on data from Farmers National. While this reflects a $1,000 increase per acre from last year (nearly 7% growth), it pales in comparison to the 22% surge witnessed between June 2021 and June 2022. Other states in the Corn Belt region experienced proportionally similar changes in their farm acreage costs.
Farmers National predicts that the strong interest in purchasing farmland will persist but highlights significant obstacles to further gains, particularly if commodity prices begin to decline. “Demand for high-quality cropland remains robust. However, rising interest rates, inflation, and supply chain concerns are tempering this demand,” explains Schadegg. Additionally, he emphasizes that the full impact of higher interest rates on farmland prices is yet to be experienced.
Nevertheless, economists assert that the market is unlikely to completely reverse from its record-high levels. “Farmland as an asset class benefits from scarcity value,” affirms Ken Zuckerberg, lead economist at agricultural lender CoBank.
Limited and Shrinking Farmland in the U.S.
According to data from the Department of Agriculture, farmland in the United States is facing significant limitations and a concerning trend of shrinking. In a recent report released by the USDA, it was revealed that the total amount of land in farms has decreased by 1.4% over the past eight years, currently standing at 893.4 million acres through 2022.
One of the main factors contributing to this decline in value growth is the adverse impact of drought on farmland. Curt Covington, a senior director with agricultural lender AgAmerica, highlights that regions like the West are experiencing a noticeable slowdown of appreciation due to ongoing water concerns.
Drought conditions have reached dire levels in parts of the Southern Plains and the Midwest, with states such as Nebraska, Kansas, and Missouri enduring exceptional drought conditions—a classification indicating the most severe drought level according to the U.S. Drought Monitor.
In addition to these challenges, row crop futures have seen a significant decrease in value since the beginning of the year. This decline in prices for crops like corn (26%), soybeans (10%), and wheat (19%) may add further pressure to the growth of land prices as profit margins become increasingly squeezed. Currently, futures are experiencing mixed trading on Friday.
As a result of the drop in commodity prices, farmer sentiment has taken a hit. The latest monthly survey conducted by Purdue University and the CME Group indicates that since the start of the year, farmers’ confidence has been gradually declining. The June survey revealed that 40% of farmers believe their operations are “worse off” compared to the previous year.
It is evident that these challenges and concerns surrounding farmland in the United States require careful attention and support for sustainable agricultural practices and efficient resource management.