Experts expect farmland values to plateau in 2023 after a run of record-setting sales across the country.

Interest rates that have risen from virtually zero to about 5% in less than a year have created a challenging environment for investing in farmland. Although the hard asset is considered an inflation hedge, the barrier to entry is steep as farmers also face a lower farm income forecast and a projected decline in commodity prices, experts say. 

A combination of strong commodity prices, relatively low interest rates for most of 2022, inflation, limited land availability and good water availability pushed land values to levels in 2022 that Randy Dickhut, farmland analyst for Agricultural Economic Insights, describes as “astronomically high.”   

The average value of cropland reached a record $5,050 per acre in 2022, a 14.3% increase from 2021, while pasture values increased by 11.5% to an average of $1,650 per acre, also a record, according to the USDA Land Value 2022 Summary.

Land was sold for as high as $30,000 an acre in Sioux County, Iowa. The price for the 72.49 tillable-acre tract was more than $2 million. 

Chad Hart, professor of economics and extension economist at Iowa State University, said the strong economy and low interest rates – paired with the opportunity for a high rate of return – have made farmland an attractive investment. 

“We had those low interest rates with this high farm income and you put that recipe together, that helps to drive folks looking at agricultural lands as a good place to define value,” Hart said.

Net farm income in the U.S. reached $140.9 billion in 2021 and grew to $162.7 billion in 2022. The USDA 2023 Farm Income Forecast released in February estimated net farm income would decline 15.9% in 2023 to $136.9 billion. 

A decrease in farm income would make it more difficult for farmers to access the capital needed to purchase land and also lower the earning potential on acquired acreage. 

Chad HartChad Hart, Iowa State

Farmland values in Iowa skyrocketed 29% in 2021, and an additional 17% increase was observed in 2022, according to the 2022 ISU Land Value Survey. Hart attributes the increase in farmland values to historically high commodity prices.

“A lot of that growth has been concentrated here in the upper Midwest, especially as you look at corn and soybean country,” he said. “Those two crops have been very profitable for two years now.”

USDA said that in 2022, the average corn price increased 14.4%, soybeans 13.41%, soymeal 9.9%, and soy oil 13.3%. The USDA Farm Income Forecast expects cash receipts from the sale of agricultural commodities to decrease by $23.6 billion – or 4.3% – in 2023. 

In the West, increases in land values have been driven primarily by water rights and limited land availability. 

“We don't talk about land without talking about the irrigation water here,” said Dan Sumner, an agricultural economist at the University of California, Davis. “Land without the water is worthless. So step one, what are somebody’s water rights?” 

Water rights and access to water are largely determined by independent water districts that have authority over usage in their area. Some producers get water from canals that carry it from reservoirs. Other farms rely on groundwater, which can be expensive because of equipment and electricity costs. Increased pumping decreases the water table, leading to a higher cost for water.

“Out here, we talk about how secure the water rights are associated with that piece of land and the access to water. That determines the value of it,” Sumner said. “It doesn't help that piece of land to be fertile if it doesn't have irrigation water.”

Water supplies are nearing record levels in 2023 in the state. The California Department of Water Resources reported that a manual survey recorded 126.5 inches of snow depth and a snow water equivalent of 54 inches at the Phillips Station location on April 3. The snow level is 221% above average. 

Statewide snowpack snow water equivalent for April 3 is 61.1 inches, or 237% of the average. 

But Sumner said while farmers may be more optimistic this year because of the increased precipitation, “there's no particular reason that I think 2023 is going to be above or below trend.” 

Meanwhile, the central and southern Plains is still facing water shortages because of the shrinking Ogallala Aquifer. Farmers in southwestern Kansas, eastern New Mexico, Oklahoma and Texas are drawing from wells depleted more than 100 feet since 1950, making irrigation and water access challenging. 

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Several factors, including declining groundwater supplies, are causing values to decline this year across the Kansas City Fed's district, which includes Colorado, Kansas, Nebraska and Oklahoma, said economist Nate Kauffman, senior vice president and Omaha branch executive for the Federal Reserve Bank of Kansas City.

“In general, I would expect there to be more headwinds as it relates to land values. We've started to see some of that softening already,” he said. “Commodity prices have not necessarily been increasing at the pace they happened last year, and costs are still high. We see pressure associated with higher interest rates now.”  

Kansas had the largest spread in price increases between irrigated and non-irrigated land last year. The value of non-irrigated acres increased by 26.7% from 2021 to 2022, while irrigated farmland increased by only 8.1%, according to the USDA land value report. 

A Kansas State University study released in March 2023 found that a one-foot decline in groundwater stock in the Ogallala Aquifer is associated with between a $3 to $15 per acre decrease in value of irrigated land. The returns on land in Kansas –  just one of the southern Plains states affected by the depleted aquifer are expected to decline by $34.1 million annually by 2050 because of the decreased irrigating abilities. 

One option for farmers dealing with limited water could be transitioning production on a piece of ground. Kaufman said some landowners have tried using their ground differently, in particular by transitioning away from livestock with higher water and feed costs. 

Randy DickhutRandy Dickhut

The quarterly Ag Credit Survey released by the Kansas City Fed in February 2023 indicates that the growth in farmland values has softened for lower-priced land and in states affected by drought. 

The Fed’s 2023 outlook “remained positive despite some persistent risks.” A majority of bankers surveyed for the survey anticipate a decline in values with higher interest rates expected in the future. 

“A lot of our contacts are suggesting that we likely won't see the same kind of growth this year,” Kauffman said. 

Eric Sarff, president of the nationwide transaction advisory firm Murray Wise Associates, said clients have seen farmland ownership as an inflationary hedge, but he expects values to plateau. 

“I think the initial wave of people that sold were people that probably missed the market when it was high and 2013 and 2014, then in 2015,” he said. “They told themselves, ‘If we ever get back to this level, we're going to sell,’ and I think we saw a lot of those people move through the market during the 2020 and 2021 years.”

Dickhut, the retired analyst with Farmers National, expects fewer acres to go on the market and agrees that rising interest rates are a barrier to would-be buyers. 

“People who wanted to sell sold on the run-up and now are sitting tight,” he said. “Now we're seeing the normal inheritors that are selling, so it's definitely slowing down.” 

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