How Do Interest Rates and Inflation Affect Farmland Values?
13 January 2023, US: Farm land values have been increasing over the last three years, with a record increase in values in 2021. Most farm land sales occur after harvest and going into the winter.
For the 2022 sales season, we do not see any significant effect of higher interest rates on new sales, and land values are still strong. This is because farmers have had a better year than expected, with high prices for commodity crops (corn 10.2% and soybeans +15.3% between December 2021 and December 2022) and sound balance sheets. These two factors increase demand for farmland.
In addition, the real mortgage rate (mortgage rate minus inflation) is one of the best predictors of farm land value change. Currently, the real mortgage rate is still negative but approaching zero (6.33% mortgage rate, and 7.1% inflation rate in November 2022 ), which indicates positive increases in farm land values of +8.8%.
[READ: December Fed Meeting Recap: Still A Good Time to Secure Short Term Financing]
We see stability so far, but that could change. The future ahead depends on the interaction of two main factors:
- Interest Rates: If the Fed successfully controls inflation and interest rates peak next year and start to decrease, that would be a positive sign for farm land values. If the Fed needs to push more with their tightening policies and increase interest rates for an extended period, that would eventually reduce purchase power from farmers, leading to lower farm land values.
- Farm Profits: Fertilizer, chemical, and energy costs are expected to be higher next year. If commodity prices increase more next year, compensating for those higher costs, demand for farm land will likely stay strong. If commodity prices do not increase to compensate for those higher costs, farm profits will be lower, reducing the interest in farm land purchases and probably reducing farm land values.
The balance between those two determinants gives the following four scenarios, with the respective outcome in farm land values:
|Scenario||Fed successful, higher commodity prices||Fed successful, lower commodity prices||Fed keeps increasing rates, higher commodity prices||Fed keeps increasing rates, lower commodity prices|
|Cost of Capital||Lower||Lower||Higher||Higher|
|Farm land Values||Higher||Neutral||Neutral||Lower|
The Time Might Be Right to Apply for a Land Loan
Even though rates are high, the market is predicting they will rise even higher. Now may still be a good time to purchase that ag land you have your eyes on. The FBN Finance team is ready to support you as you finance your operational expansion. Click here to learn more about land loans and other financial services from FBN Finance.
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