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August 22, 2022
There is much discussion around whether farmland prices are topping or if they will continue upward, albeit at a slower pace than the past year. The question especially arises after the large increases in land values of 20-30% or more during the most recent twelve-month period on top of smaller increases over the past several years putting the market at new historic highs in places. But, have the underlying factors supporting land prices changed, and what other factors may influence values in the future?
The old adage "All real estate is local." holds true for the farmland market. Recently, Farmers National has had auction sales of cropland selling much above expectations. At the same time, there have been "no sale" auctions in other areas where buyer attitudes were more cautious. The local impact of variable farm incomes in 2022 because of drought conditions will have some influence on how aggressive farmers and ranchers will be in pursuing a land purchase. Other areas will have good yields resulting in better liquidity to make a purchase. Rising interest rates bring in a more cautious mood for the land buyers mortgaging a land purchase. Uncertainty about future commodity price levels, input costs, and general economic conditions also dampen buying enthusiasm for some investors and farmers to push prices.
On the positive side, most of the underlying factors supporting current land values are still in place such as overall good farm income for 2022, the outlook for grain prices to stay above average, and adequate liquidity. At the same time, the outlook for alternative safe and secure investments is more uncertain than in the past few years which is generally supportive of land values. An analysis of capitalization rates, rental rates, and current land values indicates that nothing is too much out of balance in rationalizing today's farmland prices. Then there is inflation and the accepted norm that inflation is positive for real asset values.
With variable signals from the factors influencing farmland values, the upcoming auction season will ultimately tell us the direction of the land market. A person's perspective will influence their outlook on land prices. Those who tend to be more cautious or who lived through the 1970s and 80s in agriculture probably have a different and more cautious view of the recent up moves in land prices compared to those who did not experience that time. But, agriculture is in a very unique period of world uncertainty, recent inflation and rising interest rates, higher input costs, and the prospect of water scarcity around the world impacting the production of food, energy, and fiber. Despite the current question marks, the longer-term view for U.S. agriculture and land values is accepted to be strong.
Senior Vice President - Real Estate Operations
|Category: Agricultural Real Estate News|