What Lies Ahead for Farmland Values
What’s Happened….
The value of farmland has skyrocketed in recent years, with some studies indicating increases from 30% to 50% over the last three years. Driving values upward was a long-term low interest rate environment and a bull market in grains and oil seeds. Financially, many farmers have had some of their strongest balance sheets in recent years. The rally in commodity prices started in 2019 when a cold and wet spring led to less-than-ideal crops and eventual downward adjustments to quarterly stocks in 2020. Strong demand and tightening ending stocks over the next two years due to less-than-stellar crops, a weak dollar, and strong exports had traders on the offensive. A drought in the Brazilian soybean crop in 2021 and the war between Ukraine and Russia in 2022 exasperated a bull market that was already in place. The natural progression was for farmland prices to go higher and higher with farmers chasing limited supplies of saleable land. The question now, have farmland prices peaked?
Why is this Important….
The essence of land valuation is that it boils down to debt load and commodity prices as gauges to farm financial health. Interest rates experienced an unprecedented rise due to the Federal Reserve rapidly ratcheting up rates to curb inflation this past year. This, coupled with sharp declines of corn, soybeans, and wheat prices this past year has the table set for what may be a very difficult financial time ahead for many farm operations, as cash flow shrinks and debt rises. Landowners will need to make difficult decisions. Do they sell when the market price is high, or do they hold for the long run? For most actively farming, the question of selling is not viable or likely. For landlords, it may be a different story. Do they lower rents? Lower commodity prices and higher borrowing costs will eventually catch up to both farmers and landlords. Even if you were aggressive at forward contracting a year ago for 2023 crops, the next couple of years look bleak, with weak deferred future contract prices. It might take a drought or some other supply disruption before prices can recover, as world supplies grow. Out-of-control government spending and a spiraling deficit is facing all Americans. A correction in farmland values is imminent, given current circumstances. If looking to buy, jumping at high land prices just because it’s available should be well thought out. The current market conditions are reminiscent of the late 1970s and early 1980s. Then, just as could be the case now, a sharp decline in land values and a shakeout in the farming community could be at hand.
What can you do?
To avoid the pitfalls of too much debt, it may be a time to pull your wings in and not chase land values. This is harder said than done, as the opportunities to capture more land and grow your operation are usually limited in most years. The next couple of years may not be like most. Resisting the want to buy more land may be especially difficult if it is close to or adjacent to your farmstead. Yet, now is the time to curb that enthusiastic buy-at-all-costs approach. Think clearly, not emotionally. Bottom line, if the numbers do not work, then do not chase. If you’re at a point in your life where you want to capture current high land value, then seek buyers sooner than later. Your opportunity window is closing with little sign that interest rates are ready to retreat much, if at all, or commodity prices rebound. It appears now that the Federal Reserve may only make minor adjustments to borrowing rates in contrast to ideas of strong cuts just a few months ago. Inflation appears to not yet be under control, heading into the spring planting season. It is time to be penny-wise and dollar-smart.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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Bryan Doherty