Land values are holding up throughout the High Plains, according to an expert who tracks rural real estate sales.
Paul Schadegg, senior vice president of real estate operations at Farmers National Company, Omaha, Nebraska, says the double-digit increase in values in recent years has slowed but the market is resilient.
“A year ago we fully anticipated see some settling in the market,” he said. Instead the market went a different direction. “It really accelerated into the second half of 2022 and we really didn’t see any kind of settling until somewhere between the third and fourth quarter.”
Sales were still accelerating but they have shown signs of single digit increases like the previous couple of years.
The result is values are still impressive, he said, the bottom line is while the gain has slowed farmland is not losing value. He expects more of the same in 2023, with values holding their own and, in some cases, still increasing but not at the previous levels.
“Farm operators are 80% of our buyers and they are our largest group of buyers though there are investors in the mix and they definitely help solidify the values. The farm operators are still the successful buyers of most farmland.”
Because of commodity prices and other factors, the farm operators have had money to invest in expansion and in the past two years they have focused investment on additional farmland.
What Schadegg has observed is lending institutions have seen more activity and debt service ratios have increased. As those lines become more connected it does not mean a crisis is coming but rather operators are being more cautious about purchases that require debt.
“Instead of paying a high premium and running up the land values I think they’re going to be a little more cautious and they may say, ‘Even I though really want to buy this farm that’s right next to me I’m only going to push it so far,’”Schadegg said.
Due diligence
Another factor is that, while banks and lending institutions are starting to see debt grow, delinquency rates are historically low, which means balance sheets are good and lenders are taking note, he said. Rising interest rates and persistent inflation have been the story of the past year and when they both go up it increases expenses, he said.
Drought has also been a part of the equation. One report from western Nebraska indicated some heavy snow had fallen in recent months and while that has helped the region it is still well short on subsoil moisture. In western Kansas and eastern Colorado those lands have missed out on beneficial snowfall are worse off.
“We’re starting to see some guys be cautious about land purchases. A lot of them are thinking ‘I can’t afford to go through another dry year.’”
Even areas where irrigation is prevalent, he said, those producers are also needing rainfall to alleviate stress on the center pivot. Plus there are management areas that can limit the amount of inches an irrigator can apply in a year’s time. That comes on the heels of a second straight year of severe drought.
“There’s some real concerns of when the drought is finally going to break and so I think that does play into their (farm operators) temperament,” he said.
Drought-impacted regions are also seeing an impact on pasture values and in particular western Kansas and eastern Colorado producers are more cautious because all they have to do is look out and see the brown and instead of green pastures.
“We’ll get out of this drought and we’ll be good again but it’s going to take a pretty strong spring rain event to break that and make the grass and pastures look better,” Schadegg said.
Candid advice
Land purchases depend on several scenarios.
“No. 1 is profitability, which is related a lot to the commodity markets,” Schadegg said. “I really think that commodity markets are going to continue to be the biggest driver in land values. The second part is the supply and demand scenario.”
Demand remains strong across the United States and in other agricultural regions around the world because operators are still wanting to grow their operations and expand. There are also sideline investors such as investment and fund groups continue to see agriculture land as an opportunity for investment and long-term appreciation.
“Those two factors are going to keep the base of ag land values still pretty strong, especially for those of us who have been in the industry for a long time,” he said.
Values traditionally hold
For many years value trends increased incrementally but in the past 10 years the values have dramatically risen. “We don’t see those dropping unless there is some catastrophic event that happens. I think what we’ll continue to see is maybe a reset but it won’t drop but it will reset at a high level.”
With commodity markets strong and demand in place for good quality farmland that will hold values, he said.
The Federal Reserve’s decision to raise interest rates has tempered some demand but Schadegg believes indications that the Fed may not push as hard to raise rates as it did in the past year has kept the market balanced.
“We are sitting a precarious point in time where there is opportunity for buying and selling and it is almost at an equilibration.”
Buyers and sellers have both benefitted from recent markets, he believes. He often hears sellers say they never thought their land could go as high it did but buyers also continue to see it as an opportunity to expand. Schadegg encourages buyers and sellers to be upfront about the quality of their land with a realistic view.
For example, sellers and buyers in the market for irrigated farmland need to make sure there is plenty of records available on the water well depths and capacity.
“My biggest concern is in the areas where they have determined where the shallow part of the aquifer is and they do see it dropping substantially,” Schadegg said. “It is like the edge of a lake where the water is not as deep and no matter where you drill you are not going to get any more water. We’re seeing that some areas in western Colorado, definitely in parts of southwest Kansas and Oklahoma and Texas. A lot of it is caused by drought conditions.
“Looking back over time that’s really nothing new because we went through the drought periods of the early 2000s we saw the same thing happen. Then we went through some wet years in the mid 2000s and saw some recharge.”
As a result he believes that communication is key to make sure tests are done whether it is on groundwater or other reports that can help a buyer and seller both to make a good decision.
The marketplace continues to be the great equalizer, he said, and in the long run it all works out for both with sensible results.
“I’m a firm believer in that. Sometimes it is hard to understand or hard to accept,” Schadegg said. “But in the long run, especially if you start looking at longer terms and I start looking at these charts and crunching them down into short periods of time and it helps you understand what is happening today. When you stretch them back out and look at the longer period of time that’s when you see what land has done over time and who are the buyers and who are all the sellers and then it all starts to make sense.”
Dave Bergmeier can be reached at 620-227-1822 or [email protected].
