There’s only so much dirt. And the land just doesn’t turn over that often. Farmland is a precious commodity but is it still a good buy? Like many other things in life, land prices can rise and fall. But when you look at farmland prices over the past few decades, you see how consistently farmland has performed.
U.S. farmland values began rising in 1988 and essentially kept going up except for during two years (2009 and 2016), according to the USDA's annual June Area Survey. Nationally, farmland prices increased 4.4% annually between 2000-2020, according to AcreTrader’s data.
Farmland values skyrocketed in the two years since then, especially in Corn Belt states like Iowa. The Iowa State Land Value Survey found that farmland prices jumped 29% in 2021 and 17% in 2022. Commodity prices were strong and consumers’ finances were boosted by several rounds of federal COVID-19 aid. Strong demand and plentiful resources added up to prosperous times.
But there has been some pessimism. How can the growth in prices continue at those elevated levels? And what about interest rates, particularly for newer farmers or investors who don’t yet have the resources to finance a purchase without borrowing?
Interest rates have been persistently high (by modern standards) after the Federal Reserve started increasing the federal funds rate in the first quarter of 2022. The Fed hoped to cool off the economy, which had ignited as families and employers enjoyed the financial windfall of trillions of dollars of that pandemic-relief cash. Inflation has eased but the cost of borrowing has escalated. That was the tradeoff.
That triggered some of the pessimism of future farmland values. Producers had already dealt with higher fertilizer costs (spiked after Russia attacked Ukraine, a large fertilizer producer) and inflated input costs (driven by COVID-19 factors). But borrowing costs were especially low during the bulk of that period, thanks to the action of the Fed. However, now the higher cost of borrowing is a much heavier load.
Fourteen months ago, there was this article about the “fear of the bubble.” Three Purdue University economists wrote, "Given recent experiences with fluctuations in the broader economy and prior farmland price dynamics, many market participants express concern that the rapid increase in farmland prices is a signal of a speculative bubble."
The reality is that the present economic climate may offer attractive options other than farmland. Immediate returns could be guaranteed right now with bonds, money markets and C.D.’s.
Steve Bruere, founder and president of Peoples Company, acknowledges the weight of high interest rates on the farmland sector. “As we head into the typically bustling fall land market, escalated interest rates are cited as taking a toll on farmland, Bruere wrote in his new analysis, “Smart Money vs. Scared Money: Reconsidering Farmland in Today’s Market.”
Bruere encourages a broader, longer-term view. He has tracked the rate at which farmland has increased in value in the past two years. But you pay for performance, he maintains, and you shouldn’t overthink timing.
“Novice investors who try to play the market by waiting for the optimal time to buy are often frustrated by the difficulty of actually completing a transaction, while those who understand farmland realize that the specific entry point is not always the main driver in an investment these with longer duration portfolio considers. The primary focus of seasoned investors is to purchase the ‘right farm’ with the recognition that price paid becomes less important with the passage of time; and that the effort to build their total position is often a multi-year endeavor during which their other assets may also move either up or down in value,” Bruere wrote.
