Higher interest rates and weaker commodity prices may slow the momentum for ever-higher farmland values, said the Chicago and Kansas City Federal Reserve banks in quarterly reports on Thursday. “After this unusual period of large farmland gains, it wouldn’t be too surprising if we were back to that general stable [land value] scenario for a while,” said David Oppedahl, policy adviser at the Chicago Fed.
Ag bankers taking part in a Chicago Fed survey said farmland values rose by 9 percent in the Midwest in the past year. They overwhelmingly anticipated land values to be stable during the summer. In the Kansas City Fed district in the central Plains, bankers reported an increase of nearly 8 percent in farmland values this spring.
Cropland values have skyrocketed by 33 percent since 2020, a period coinciding with record-high farm income, said USDA’s Land Values report last week. Although farmers complain of bids from outside investors, they are the buyers in most cases when land comes on the market,
“Considerable strength in farmland markets has pushed value above what may be expected given the current interest rate environment and prospects for financial returns from cash rents,” said economists Cortney Cowley and Ty Kreitman in the Kansas City Fed’s quarterly Ag Credit Survey. “Some moderation in farmland values could be expected given these downward pressures, particularly for more marginal or less-productive tracts, however a steady supply of land sales and strong demand from farmers has likely supported broad resiliency of real estate value.”
Corn, soybean, hog, and milk prices in June were considerably lower than a year earlier, pointing to lower net farm income when high production costs are taken into account, said the Chicago Fed’s quarterly AgLetter. A Michigan banker said, “I would expect land values to weaken,” and an Iowa banker said the “general outlook has become more guarded.”
From 2010 to 2020, farmland values were relatively stable, and another such period may be at hand, said Oppedahl in an “Insights” feature that accompanied the AgLetter. “As interest rates move up and farm income levels come down, we could see these factors putting some additional stress on those who are purchasing farm ground. It would not be unprecedented for farmland values to give back a little of those very large gains that we’ve seen in recent years.”
Farm income softened this spring in the central Plains and mountain states while farmland values increased, said the Kansas City Fed. “Values of all types of farmland grew by almost 8 percent in the second quarter.”
Drought weighed on farmers and ranchers in many parts of the Kansas City Fed district. “Drought will affect everyone to some degree, with higher input costs, high interest rates, and a severe drought are making this a tough year, but most farmers will work through it,” said a banker in Central Missouri. A banker in South Central Nebraska said land values remained high amid good demand. “Higher interest rates don’t seem to be affecting our local economy at this time.”