While farmland values remain stable, lenders and investors are on edge. Despite falling farm income, land values are holding steady. Moving forward, what is next for farmland values?
Basic Supply and Demand
Basic economic principles of supply and demand are being exhibited in the current farmland market. Presently, supply has the advantage.
“At this time, there are enough buyers at most sales to bid up the price to a good level for the seller,” says Randy Dickhut, senior vice president of real estate operations for Farmers National Company. “But in the coming months, will buyers become even more cautious while at the same time will we see more land come up for sale for various reasons?”
This balance leaves farmland values stable, but lenders and investors on edge.
According to a recent report from Farm Credit Services of America, the pace of farmland-value drops has slowed in several areas. For the last half of 2018, values steadied for farms in Iowa, Nebraska, South Dakota and Wyoming. This conclusion is based on the 64 benchmark farms the institution monitors throughout those states.
Overall, it is expected land sales will trend back to historically average levels.
Factors Behind Farmland Prices
Farmland prices are determined by several factors. Those factors include buyer and seller expectations of current income, future income growth and the cost of capital (discount rate). Farm incomes and farm operating profit margins have had significant declines in recent years. This is largely due to the combination of continued increases in those factors of production and decreases in agricultural commodity prices.
In addition, the Federal Reserve has continued to increase the cost of short term borrowing (the Federal Funds Rate) as the aggregate economy improves. Both of these forces place downward pressure on farmland prices in the near term.
Furthermore, the impact of interest rate increases is often overemphasized. Despite what many think, there is a weak relationship between short term borrowing and farm mortgage rates. Coupled with that is the longstanding positive correlation between inflation and farmland values.
Policy uncertainty is another driving factor behind farmland price pressure.
Many market observers, however, point toward the long-run earning potential of farmland as a way to justify higher expected farmland prices.
As global demand for agricultural commodities increases, farmland prices could see rise as well.
Net farm income has fallen from 40 percent to 50 percent from its peak. Despite this, land values only declined from 15 percent to 20 percent.
As we move forward, the financial status of farmers will play a key role.
“We are starting to hear more talk about financially stressed farmers in areas who may have to sell a farm or other assets to improve their financial condition,” says Sam Kain, Farmers National Company area sales manager for Iowa and Wisconsin.
Kain said only three percent of their sales last year were due to financial stress. However, he said we could see a rise in these in 2019.
Dickhut echoed those thoughts. He said the depressed farm economy may result in financially encouraged land sales. The biggest impact will be on areas where there has been low yields.
Farmland values have stabled, but lenders are still on edge. Even with falling farm income, land values are stabilizing. As we move forward, farmers’ financial status will be crucial. Though 2018 showed little sales due to financial stress, 2019 may be another story.
Image courtesy of Virginia Association of Counties