Commentary: Farmland Market Continues to Show Strength

By Eric Sarff, President

Demand for farmland at the end of 2021 was at a fever pitch and the number of buyers in the market far outweighed the number of available farms in nearly every region. Coming into 2022 many predicted that we would continue to see strong demand for the farmland asset class, but there were still a lot of variables that could have altered the upward trajectory we were on and changed the outlook. Now that we are nearly through 2022 and looking back, some of those above-mentioned variables changed, but so far the demand for land remains strong.
A recently released survey by the Illinois Society of Professional Farm Managers and Rural Appraisers showed an 18% increase in Illinois farmland values from a year ago. The majority of those surveyed feel that we have hit a plateau moving forward, however. In Iowa we have seen similar increases. In late March, the Iowa Chapter of the Realtors Land Institute released a survey showing a 14.1% statewide increase in farmland values, from September 2021 to March 2022. This survey was recently updated to include March to September 2022, with the results being an additional 2.8%, giving a year to year increase of 16.9% across the state.
The topics that have been dominating the farmland values discussion are inflation,

interest rates and commodity prices. Farmland has always been a preferred inflation hedge by investors due to the fact that both commodity prices and land values get pulled up in times of inflation. We’ve discussed this numerous times in previous Wise Ag Update editions. This fact has continued to hold true as we have seen investors flock to the asset class over the last few years.
Interest rates and inflation go hand in hand, and the Federal Reserve has now had seven rate increases in 2022 in an effort to curb inflation. The most recent inflation report released in early November indicates a possible slowing rate, but inflationary pressures remain high across many sectors. From what I have read, many analysts predict additional rate increases in 2023. This directly affects borrowers looking to purchase farmland. I have recently heard quotes for farm loans north of 8% (30-year fixed). Those same terms would have likely had a rate of 5%, or possibly less, a year ago.

Rising interest rates have not had as much of an effect on land prices as one may think, as many buyers are using cash or tapping into built up equity in existing land, but it’s still a factor that will influence some buyers and if rates keep increasing I feel it will likely affect more buyers. On the positive side, commodity prices have remained strong throughout the year and have given growers a number opportunities to have a profitable year this year. In my opinion, if commodity prices remain strong, demand for farmland will persist as well. It will allow farmers to be both aggressive buyers of farmland, and also pay the types of rents that most investors are seeking.
Moving into 2023, I think we have a few more headwinds than we did a year ago, mainly questions about where interest rates will go and the direction of the overall economy, but I think we will continue to see strong demand for farmland from a variety of buyer groups. In times of economic uncertainty, investments that offer safe and reliable income streams are typically favored.