Farmland owners and sellers have generally done well in recent years as land values climbed to historic highs in many areas.
Bruce Sherrick, University of Illinois economics professor and director of the TIAA Center for Farmland Research, reported land values increased by nearly 40% or more in Illinois and Iowa the past two years, and just under 40% in Indiana.
The higher values helped the balance sheets for existing farmers. But the combination of high farmland prices and rising interest rates is putting a squeeze on many young and beginning farmers.
“The farmland market has been on a two-year bull run,” Sherrick said at the WILL Ag Outlook meeting in Covington, Indiana. “How does it make sense?”
The jump in farmland values is not a bubble, but instead represents a combination of economic factors that came together, Sherrick noted.
The explanation of some eye-popping farmland auction prices includes historically high farm income the past two years, strong demand for ag products and inflation across the economy among other factors.
“I think the markets are exactly right,” Sherrick said. “We printed a lot of money (during the COVID pandemic). That has to go somewhere.”
Meanwhile, a thin market gives buyers extra incentive when they see a “once-in-a-lifetime” opportunity to buy some ground. Only about 1.5% to 2% of farmland turns over each year.
“The big change in interest rates gave cash buyers an advantage,” said Sherrick, who noted U.S. farm debt is only around 13%.
A recent survey of farmland purchases in Iowa showed roughly 60% of buyers paid in cash.
But it’s added another hurdle for those looking to buy or start a farm with a loan. That includes most beginning farmers.
“Interest costs for acquisitions have gone up,” said Bob Rhea, CEO of Illinois Farm Business Farm Management.
“It’s made it tougher for the younger generation to come back to the farm and it’s increased the cost to transition farms,” he noted. “We’re looking at higher tax implications moving forward.”
The Federal Reserve Bank of Chicago reported agricultural land values in its district increased by an average of 12% in 2022, which pushed values to a new peak.
But the district’s average nominal interest rates on farm operating, feeder cattle and farm real estate loans were at their highest levels in 15 years.
The Illinois Society of Professional Farm Managers and Rural Appraisers will release its annual report on land prices and cash rental rates across the state at the Illinois Farmland Values Conference March 23 in Bloomington.
Looking ahead, Sherrick believes the bull run in the farmland market could ease this year, which could help beginning farmers.
But he certainly doesn’t foresee any signs of a crash.
“I’m not as rosy (on higher farmland values this year),” Sherrick said. “I’m not saying we’re looking at an impending crash, but I won’t be surprised if we see a little pullback.
“The wildcard is the Fed and the size of its balance sheet,” he added. “Unwinding that (infusion of about $2 trillion into the U.S. economy) is a really big deal.”
While the Fed could continue to increase interest rates near term, farmland purchases still represent a good, long-term hedge against inflation, Sherrick added.