U.S. farm real estate values rode the express elevator to the penthouse during the commodity boom, gaining an average $860 an acre in five years. They are still at elevated levels despite the sharply lower farm income of recent years but may drift lower in the near term, according to two examinations of the farm economy.
Land is the anchor of agriculture; it accounts for 80 percent of farm assets and a farmer’s greatest source of equity. Fluctuations in land value can dramatically affect a farmer’s financial health and ability to secure a loan during tight times. Low inflation and interest rates have helped maintain land values during the stretch of low commodity prices that began at mid-decade.
“Although farm real estate markets have been relatively stable amid significant declines in commodity prices and farm income, risks of further declines in farmland values appear to have increased,” wrote economists Cortney Cowley and Nathan Kauffman in a Kansas City Federal Reserve Bank bulletin last week.
Meanwhile, the Food and Agricultural Policy Research Institute projected a marginal decline in farmland values this year and next before a mild recovery begins. In 2023, the average land value would equal the $3,140 an acre reported by USDA for 2018. The University of Missouri think tank says farm debt will increase and farm finances will remain under pressure in the years ahead.
Adjusted for inflation, farm income over the next decade will be “fairly flat,” said FAPRI director Pat Westhoff on Tuesday. “So at least that indicator is not getting worse – but it’s also not getting better. The real question…is whether accumulated problems over the last several years will eventually cause a more serious break.”
Agricultural economists have monitored the farm sector since the early days of the commodity boom for signs of the disastrous collapse in land values that was part of the agricultural recession of the mid-1980s, the worst times in living memory for most farmers. By many accounts, prudence guided farmers and lenders during the boom and afterward.
While farm debt is up and exports are down, “other indicators do not yet support the notion that we are heading into the same situation” as the 1980s, said USDA chief economist Rob Johansson at the USDA Ag Outlook Forum. Interest rates and inflation rates are low, farm debt is secured by fixed-rate loans rather than the variable rate loans popular in the 1980s, and the sector was in stronger financial shape when the downturn began than in the 1980s.
Farmland values slipped after the commodity boom collapsed. The Kansas City Federal Reserve says cropland values in the Plains are down by 16 percent since 2013, the peak of the commodity boom. Farmland values in Iowa crested at $8,716 an acre in 2013 and fell in four of the five following years, to an average $7,264 an acre in fall 2018, according to Iowa State University. In the central Midwest, agricultural land values fell by 6 percent from 2013-18, said the Chicago Federal Reserve. In its survey of agriculture bankers, 75 percent expected stable land values up to planting time this year.
To date, farmers have been the featured buyers when comes on market, according to land management companies and ag lenders. Land values have been supported by low interest rates and by the relatively limited amount of land that has been offered. “However, if farmland sales continue to increase in 2018 alongside persistently low commodity prices and higher interest rates, farmland values could decline further,” say Cowley and Kauffman of the Kansas City Fed.
In its annual Land Values report, the USDA says the average value of farm real estate, which includes the value of land and buildings, soared to $2,950 an acres in 2014 from $2,090 in 2013 and has been fairly steady since. The same holds true for cropland, which has been on a plateau since 2014. The USDA is scheduled to issue the 2019 report on August 6.