Has the boom in farmland prices peaked?

The latest series of reports from the nation’s largest landowner services company shows an ongoing boom in farmland prices. High commodity prices are driving the farmland market and will continue to be the main driver in land values, despite high input costs and the threat of inflation.

“The outlook for continued strong land values remains strong moving into 2023,” according to a Jan. 4 press release by Farmers National Company, which reported, “The land market momentum that began in late 2021 accelerated into 2022 and was driven by competition for high quality cropland; it resulted in both record sales and overall increases in land values across the country.”

According to Farmers National, strong demand across all of the country’s regions, bolstered by high commodity prices and continuing demand, brought opportunities to landowners. Aggressive land buyers drove competition through public and online auction methods, giving what Farmers National said was “a true market value in those specific areas.” Furthermore, most successful bidders were farmers rather than investors.

Farmers reported a new record sales volume of $766 million during 2022, exceeding the previous record set in 2021 of $750 million. Most sales came through competitive auction methods (76%) with increases in both total transactions and acres sold. The final results at these auctions set records in several states and have increased year-to-year values between 20% to 34% across Corn Belt states, according to the most recent report from the Kansas City Federal Reserve.

“What we are seeing is a true supply and demand scenario. There are simply more buyers willing to bid on the limited amount of land coming to the market. Current commodity markets and strong cash rents provide buyers with the necessary returns to meet their investment criteria while giving them the opportunity to expand operations or add land to their investment portfolio,” said Paul Schadegg, senior vice president of real estate operations for Farmers National Company. “Our anticipation is that these values will remain strong coming into the new year with continued strength in the ag economy although we may see less and less of the record sales.”

A land values map released by the U.S. Department of Agriculture’s National Agricultural Statistics Service in August 2022 shows national average farm real estate values per acre steadily rising since 2009, to $3,800 per acre in mid-2022. Average cropland value rose from $2,700 per acre in 2010 to $5,050 per acre today. The map shows the highest farmland values in states that have big populations centers nearby—California, Illinois, Massachusetts and New Jersey. Farm acre values close to urban centers benefit from reduced transportation costs to big markets, as well as from interest from commercial developers.

Who are the land buyers? Back in November, a New York Times story about the rise in farmland prices dwelt on outside investors like equity funds and suggested they were “pricing out farmers.” But Farmers National reported that the “traditional local farmer-operator” was the successful buyer of farmland 75% of the time.

“[L]and investors are certainly part of the equation as they have been active bidders at most sales to a point that has set the floor on values,” said Schadegg. “While the investor may not always be the buyer of land, they are part of the competition driving the values higher. We also expect this trend to continue as many investors see the long-term value of farmland, the opportunity to diversify investments and the value of land as a hedge against rising inflation.”

In 2022, the northern region—the Dakotas and northern Minnesota—witnessed record farmland prices. A 25% increase over 2021 was the average common denominator, said Brian Mohr, area sales manager-northern region. “The highest prices were achieved for farmland within 10 miles of a major city with a $15,000 per acre sale recorded east of Sioux Falls. And this is for non-development land, as commercial prices were off the charts,” Mohr said. “The majority of the rest of the top sales were seen in the narrow band along and east of Interstate 29. We anticipate the strong prices to continue into early 2023, or until we see a drop in commodity prices.”

Quality is king

In the eastern Corn Belt of Indiana, Ohio, Michigan, Kentucky, land prices have remained at historically high levels throughout 2022 and the trend has continued through the post-harvest fall selling season. According to Jay VanGordon, area sales manager-eastern region for Farmers National, top end selling prices for highly productive land with a large percentage of tillable acres remains strong across all states.

Quality remains the No. 1 factor in potential selling price in all states within this region along with competition for land in any given local market. “Despite higher crop input prices over the past 12 months and rising interest rates, continued strength in the corn and soybean markets has driven profitability in 2022 and as a result, kept land sale values at higher levels,” VanGordon said. “Looking forward into 2023, we are seeing a smaller amount of land for sale in the east for the first quarter of 2023 as many landowners who have been considering selling or were motivated to sell by high prices have done so. We are also seeing some softening of farms with medium quality soils and lower tillable percentages as well.”

2022 just as busy

In the east central region of north and west-central Illinois, assistant vice president-eastern region Linda Brier reported that the fall of 2022 proved to be just as busy as the fall of 2021 for land auctions, if not busier. “We had more auctions in this area, as well as private treaty sales,” Brier said. Land values were up as much as 17% in some areas for the farms with Class A soils. “While we still anticipate auctions being used to sell land in 2023, this area may see more traditional private treaty sales than it has in the past two years,” Brier said.

The south-central region of Kansas and Missouri held a number of strong land auctions during the late fall and early winter. “Across these states, we’ve seen high participation in our crowds and online bidding with new market highs being established,” said Steve Morgan, area sales manager-south central region. “Over 8,500 acres traded hands through simulcast land auctions in the final months of 2022. Sales continued to show high demand for good to excellent cropland and strong demand for hunting properties. We’ve seen another 10% increase in quality dry cropland across Kansas and Missouri since mid-year numbers. Irrigated land continues to have a very strong values in the marketplace when it comes available.” Morgan said the area continue to see strong demand with cooperative input pricing, crop prices, weather conditions and world headlines. Investors are participating; however, many of the farms are still being purchased by local producers.

Values of high quality, productive farmland in the western region—western Nebraska and northeast Colorado—remain strong, Farmers National reported. “We are still experiencing near all-time highs for quality irrigated and dry land farms. Continued drought and economic pressure are causing less desirable tracts of land to see some discount from the highs experienced in 2021 and most of 2022,” said Cole Nickerson, area sales manager-western region. “Going forward, weather and macroeconomic factors such as interest rates and commodity prices are going to decide whether higher quality farmland values stay near their current high or if they also start to slip.”

Land inventory could be a supporting factor for strength of sales in the area, Nickerson said. Lower numbers of farms are for sale now compared to the previous two years. “Much like other markets, farmland values in western Nebraska and Colorado can be classified as strong but volatile as we look into 2023,” Nickerson said.

Irrigated land

In the southern region of Texas and Oklahoma, demand for quality irrigated land remained steady through the fall months. The irrigation water production is the main factor for value in the area, noted Tyler Ambrose, area sales manager-southern region.

That didn’t hold for non-irrigated dryland, however. “The demand for dryland and pasture became stale with little to no increase in value for these land classes. The ongoing drought in Oklahoma and Texas slowed demand in late summer and into the fall months. In the recent weeks, we have seen an increase in interest for all land classes with potential sales being favorable into the coming months,” Ambrose said. “With a lack of inventory on the market, buyer interest will increase and could push sales. However, market values do not appear to be increasing.”

Chas Wheeler is the owner of Wheeler Auctions and Real Estate that operates mostly in Missouri and Illinois, which are both states with large population centers whose crop acres were relatively well-watered during the drought. Missouri and Illinois are among the states with top prices per acre for good farmland, according to the USDA’s land values map. Wheeler said he has seen no pull-back of interest in good farmland recently, despite higher interest rates and rising input costs for growers. More sales of farmland are through auctions rather than private contracts, he said, a sign of heightened interest.

Iowa values plateauing?

In the west-central region of eastern Nebraska and western Iowa, Farmers National reports “outstanding prices for high quality ag land in areas of good grain markets and local competition.” Currently, farmers and investors with cash or 1031 money available are the biggest drivers in the market and the reason why Chanda Scheuring, area sales manager-west central region, said she foresees prices staying strong into the new year. “If things begin to change more with commodity markets, inflation or world events, I believe we could see a softening in the real estate market,” Scheuring said.

“While the volume was down slightly from a year ago, we continued to see strong prices and record sales in many areas,” said Thomas Schutter, assistant area sales manager. “The latest Iowa State University Land Values Survey showed average land in Iowa increasing 17% over the past 12 months. Our sales coincide with those estimates, with much of the gains coming the first three quarters of the year.”

Looking ahead, Schutter anticipate the higher interest rates and input prices to eventually soften up demand. “But before we see a drop in value, we will have to burn through a couple years’ worth of liquidity, which may take more time than originally anticipated,” Schutter said. “All in all, we continue holding prices up near record highs while continuing to see a strong demand to own farmland in Iowa and southern Minnesota.”

Statewide auction data tracked by Iowa Appraisal suggests that land market conditions in Iowa may have plateaued. Iowa Appraisal’s farm appraisal expert Jim Rothermich announced a 13.4% increase in Iowa land values for the period Jan. 1, 2022, to Jan. 1, 2023, with a statewide average price for tillable farmland of $13,742 per acre. The Jan. 1, 2022, statewide weighted average price for tillable farmland was $12,450 per tillable acre. The first six months of 2022 continued the prior year’s explosive increases, landing up 15.3%. Prices peaked in May but then declined, leveling through the rest of the year. Historical amounts of land—almost 150,000 acres—were auctioned in 2022. Auction data suggests the market has “plateaued," though land prices remain at historical highs.

“However … interest rates continue to rise and inflation becomes a large factor in cropping inputs. These factors have the impact to decrease net farm income, erode operator equity and subsequently pressure farmland value,” Schadegg said. “So we sit at a somewhat precarious point in time where opportunity exists for both land sellers and buyers, but is dependent on the continued strength of the agriculture economy to stabilize or grow.”

It remains to be seen whether or not recent Iowa land sale trends are a bellwether for broader trends in farmland prices.

David Murray can be reached at [email protected].