Farmland prices are skyrocketing and many wonder if the peak is near. Continuing high commodity prices and low interest rates make land a good investment right now, but a rise in interest rates could slow things down.
“Farmland prices in Iowa for 2021 have risen 29% on average, an increase of $2,193 per acre, with an average total state value of $9,751,” says Wendong Zhang, economist from Iowa State University Extension, referring to US-based information. Census of Agriculture estimates from 2021 to 2020. But those prices have continued to rise, up more than 40% since the end of the year, and currently average over $13,000 per acre.
Zhang says most of the highest increases are in high-quality farmland, but farmland values have risen across the board. Major positives affecting the Iowa market include rising commodity prices, favorable interest rates, strong crop yields, land availability, strong demand and investor demand, government payments and a good agricultural economy.
High-quality farmland primarily seen in northern Iowa and eastern Iowa is supporting the increase seen statewide. Of the 41 counties in Iowa that saw an increase of more than 30% from 2020, the majority are in the top three county tiers. Allamakee County and Clayton County in northeast Iowa both saw a 36.4% increase over the previous year. Scott County in eastern Iowa has the most valuable farmland, with an average price of $13,852 per acre.
Prices have continued to soar in the first half of 2022, with an increase of almost 40% – to an average of $13,812 per acre. How high can they go?
Jason Smith, land broker, auctioneer and founder of DreamDirt, says people were shocked in 2011 when a parcel of farmland in Iowa first sold for $20,000 an acre. In 2022, it is not uncommon for land to sell at this price. But when a Dubuque County farm sold for a new record high at $30,000 an acre, there was a lot of chatter.
Smith says proximity matters. This one was close to the town of Dubuque, and although it can be cultivated now, he expects it to be developed later.
“It’s pretty easy to see that farmers don’t have to worry that $30,000 is the new market high. I find it hard to consider this to be an Iowa farmland price record,” Smith says. “This is, as far as I know, the highest auction result for a property currently used for agriculture. I believe that for it to be considered a farmland price record it must be on a farm that is currently being used for farming and will likely continue to be used only as such for the next 30 years .
Rachel Tiffany, land broker and auctioneer at DreamDirt, said with rising interest rates and an expected continued rise, investors may pull out of farmland, which could lead to lower farmland prices. In the coming months.
Investors have been interested in buying farmland due to rising inflation, according to Zhang. Currently, inflation is the highest in four decades, prompting these investors to buy farmland and other real estate. These people have other investments, and farmland adds diversity to their ownership.
“From a farmer’s perspective, the more interest he has to pay on a loan, the less the seller will receive. There is still a lot of competition between local farmers and investors competing to buy more farmland at this stage because even though the rates have gone up, the interest is still relatively low,” says Tiffany.
Other Factors Affecting Land Values
Expect the commodity supply and demand cycle to continue to affect land values. Smith says the pressure of the Ukrainian-Russian conflict has left the market with many questions.
“Absent a crystal ball, no one knows how long and how much this single issue will contribute to changes in supply and demand,” he adds. “There are not as many crop exports from Ukraine, which is causing more demand for crop supply in the United States and driving up commodity prices.”
The possibility of buying agricultural land has increased in this case, with the need to produce more of the land and to obtain a higher price for it. “While we don’t know how long the war will impact Ukraine’s exports, we are seeing more people justify their purchases with this opportunity,” Smith said.
When to sell
Tiffany says that for those looking to sell their farm, the time has never been better than now, but she advises doing so before the harvest ends this fall.
“Simply put, to capitalize on high farmland prices, you really want to sell when interest rates are low, commodity prices are high, the supply of available acres on the open market is low, and the demand for 1031 exchange buyers and farmers is high,” she says.
And even if investor buying is on the rise, interest rates are likely to reverse that trend. “We expect to see three or four interest rate hikes in each of the next two years. The market may be sensitive to these interest increases, which will lead to downward pressure on investments by 2023,” Zhang said. “But historically, commodity prices and farm incomes are in a cycle. The farmland value by association is quite sticky, especially on the downside. »
Zhang says this increase in Iowa farmland values over the past 18 months is the highest since 1941, when the first farmland value survey was conducted. Crop income for 2022 is still unknown and is a different figure from commodity prices, but may fluctuate depending on prices when marketed. Livestock prices are also higher than they have been, supporting land sales prices.
Post-harvest prices in the fall and winter of 2022 for grain and farmland will tell a lot about where Iowa’s farmland prices will be in 2023.
“We saw fertilizer and input costs earlier in the year put pressure on farms, only to then drop 30% as we watched diesel prices climb 50%. Inflation still hits farms hard. The more leverage, the worse,” Smith says.
“We can look back just to the late 70s and early 80s to the agricultural crisis to see great examples. There is no doubt that many farmers over the age of 45 today have memories of that time.