18 November 2022, US: Fueled by high commodity prices and low interest rates, U.S. farmland prices increased at a record pace in late 2021 through the first half of 2022. The end of fall harvest ushers in the peak season of farmland buying and selling. Will farmland values continue to climb this year?
While it is impossible to forecast precisely how these factors will play out in future months, there are a few key trends in farmland values that will continue to shape the farmland marketplace.
Increasing Farmland Valuation Trends:
- With high commodity prices and government payments augmenting farm income, American farmers had more cash savings available to buy more land, thus escalating farmland values.
- Historically low interest rates for land loans enabled farmers to obtain larger loans to purchase more land.
- Low interest rates for bonds and treasuries, which were below inflation, meant that those alternative investments were less attractive, while farmland as an investment asset quickly became more appealing for farmers.
- Current mortgage rates are still below inflation, which is typically associated with positive increases in farmland values. (See the Farmland at Risk: An FBN Special Report for more information on these trends.)
- Persistently high inflation makes farmland an attractive hedge due to its historical capacity to increase value during inflationary periods.
Decreasing Farmland Valuation Trends:
- Since the start of 2022, the Fed interest rate has increased from 0.08% in January to 3.08% in October. This is one of the sharpest interest rate increases in a generation.
- Higher interest rates generally reduce the attractiveness, and therefore value, of any risk-based asset class as risk-free alternatives become more attractive from a return and price-to-earnings perspective.
- Agricultural production costs have increased substantially, primarily mainly by higher fuel and fertilizer costs. (See the 2022 FBN Fall Fertilizer Price Transparency Report for more information on these price increases and related fertilizer usage trends).
- High costs reduce farm profits, which could slow the upward momentum in farmland values.
Illinois as a State-specific Case Study
Illinois farmland prices surged to record levels in 2021 and early 2022, with an above average volume of higher-quality parcels for sale in some regions. Across most of the state, the price of parcels with excellent-quality soil grew at a faster pace than parcels with lower-quality soils. This period also boasted a record-high farmland acreage sales volume, with many sales happening even with crops still standing in the field.
Though it is still early, trends in the data from the first part of 2022 may signal what’s to come. To date in 2022, farmland sales volume on an acreage basis is lower than 2021 figures and closer to the average of previous years. That may indicate that farmland owners tempted to sell by high prices did so already, and volume is now returning to average levels.
However, decreasing sales volume does not necessarily signal decreasing prices. In fact, sales for the first part of 2022 indicate a slight increase in farmland prices for lower quality soils and similar prices for high quality soils, using the Illinois Soil Productivity Index (ILPI) as a measure of relative quality.
This may indicate that earlier increases in farmland values have now spread to lower- and middle quality farmland. Importantly, observed trends vary significantly across the state. District-level analysis is essential for understanding how soil quality, yield, and farm production revenue shapes trends in farmland values.
For more insights into the current state of farmland valuation in Illinois, including statewide and regional trends, download the latest report from the FBN Research team. Based on soil quality data, land productivity analysis, historical ag yield data, and real estate transaction records, the team provides expert analysis around the current land values throughout nine Illinois regions.
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