Zero, 16 and 52 illustrate the wild and emotional farmland market. In 2020, not a single farm sold for more than $20,000 per acre in Iowa. In 2021, 16 farms crossed that threshold. This year, as of October, more than 50 (at least one farm every month) has sold for more than $20,000 per acre.
“Every time I think it’s a peak, we get a new record,” says Jim Rothermich, vice president of Iowa Appraisal. “Those $20,000-per-acre sales used to only happen in northwest Iowa. Now they can happen anywhere.”
U.S. farmland values have jumped 23% in the past two years. How did this happen? What will the future hold? Let’s jump into the questions driving your most valuable asset.
HOW DID WE GET HERE?
This two-year bull run in farmland values was caused by a perfect storm of factors, according to a Farm Journal survey of more than 160 members of the American Farmland Society of Farm Managers and Rural Appraisers (AFSMRA). Those factors include:
- High commodity prices and high farmer income
- A low supply of farmland
- Low interest rates (until recently)
- High buyer demand from farmers and investors
The supply-and-demand equation for farmland has shifted. For the past few years, a low supply was met with weaker but adequate demand, so prices were supported and somewhat steady. Starting in 2021, higher commodity prices and investor interest boosted demand and supply followed suit.
Nearly half of the ASFMRA members report the quantity of sales have jumped in their area in the past two years.
Due to its “safe haven” status, farmland has evolved as an asset class, says R.D. Schrader, president of Schrader Real Estate and Auction Co.
“When the rest of the U.S. economy is struggling, agriculture and its importance in the world economy really shines, catching the attention of investors of all sizes,” Schrader says. “While operators continue to be the primary buyers in the farmland market, the amount of cash on the sidelines looking to be invested at the right opportunity has forever changed the farmland market.”
In the past two recessions, Schrader says, farmland steadily outperformed the stock market:
- During the dot-com bubble of 2000 to 2002, the S&P 500 dropped 44%. Meanwhile, row crop farmland returns rose by 18%.
- During the financial crisis of 2007 to 2009, the S&P 500 dropped 46%. Meanwhile, row crop farmland returns in-creased by 26%.
ARE INVESTORS TAKING A BIGGER CHUNK OF THE FARMLAND PIE?
Farmers still buy seven out of every 10 farms, says Doug Hensley, president of Hertz Real Estate Services.
“Then you have about 10% to 20% of the market who are local and non-local landowners who don’t farm them-selves — the attorneys, accountants, business owners, schoolteachers, etc.,” he says.
One of the biggest changes in the farmland market in the past five years is the acceptance of farmland as an asset class, says Steve Bruere, president of Peoples Company.
“There’s just a big appetite and a lot of interest from investors who are looking at farmland as a financial asset in their portfolio,” he says.
“There’s an entire set of buyers with outside capital who look at farmland as an inflation hedge.”
HOW CAN FARMERS PAY SUCH HIGH PRICES?
Farmers have what Hensley calls dry powder. They have built up equity from acres they own, and they leverage it to pull the trigger and buy additional ground.
When interest rates were lower, farmers would finance larger percentages of their farmland purchases, adds Ja-son Burbage, president of National Land Realty. Rising interest rates are shifting this strategy.
“Now, they’re just putting in more cash and financing less,” he says.
WILL HIGH INTEREST RATES BE A DRAG ON VALUES?
Residential and commercial markets will feel the pinch of higher interest rates sooner than the farmland market, Hensley says.
“Production agriculture is financially healthy today,” he says. “We have lots of farmers and landowners who are ac-quiring additional parcels and are not borrowing money. So, interest rates will impact the market, but it will probably be a little bit slower to have a direct impact on farmland prices.”
WHAT ROLE IS DEVELOPMENT PLAYING IN THE MARKET?
Currently people have a strong desire to move into more rural areas, and that can stretch into undeveloped lands, says Paul Schadegg, senior vice president of real estate operations for Farmers National Company.
“In some areas, we are seeing development pressure drive sale values above the ag market value,” he says.
In many cases, higher interest rates are having a larger impact on commercial development, Rothermich says: “New construction is slowing down, so we don’t have as big of a pool of 1031 buyers.”
Also, renewable energy development is impacting farmland values, says George Baird, owner of Landmark Ag Capital.
“In the past year, solar projects have taken up 15% to 20% of my time — from selling ground for solar to working on solar leases,” he says. “Some clients have taken money they received from solar projects and did a 1031 exchange on other properties.”
WHERE DO VALUES GO FROM HERE?
A shift in any of the factors that caused higher farmland prices could equal a reverse. “Increases in interest rates and a turnaround in commodity markets would have dramatic effects on land values,” Schadegg says.
After so many records, Rothermich predicts values will be strong but level off and find an equilibrium between supply and demand.
“A lot of auctions will happen now through mid-December,” he says. “We’ll see how the market absorbs extra acres. The market will be tested, but I think it will survive well.”
“The wrestling match between land’s historical positive correlation to inflation and the downward pressure from rising interest rates will be interesting,” Schrader adds. “Farmland, like all markets, will have downswings. But the 1980s farmland market experience becomes less likely with the high level of interest from investors, who are not as tied to yearly farm income swings. We have the makings of a dynamic market.”
WHAT ADVICE DO YOU HAVE FOR FARMERS BUYING LAND?
“We’re looking at around 7% interest rates,” Bruere says. “But, the cash returns on farmland, say in Iowa, are closer to 2.5%. If you’re borrowing money at 7% and getting 2.5% back, the math doesn’t work real well.”
With prices at $15,000 to more than $20,000 per acre, buyers are playing a high-stakes game, Bruere says.
“If you’re wrong at these levels, you’re really wrong,” he says. “An old boy told me, ‘The time to buy farmland is when somebody wants to sell it.’ But high prices bring more land to the market. I worry if people are making long-term decisions based on short-term information. It would be prudent to look past today’s environment.”