DTN Ag Summit Exclusive Farmland Value Panel

Agriculture's premiere business conference kicked off in early December. "Fortify Your Financial Foundation" was the theme for the 17th annual DTN Ag Summit, presented in a virtual format. Speakers focused on commodity markets, weather, financial issues, ag technology and more. One of the most popular sessions was a panel on farmland values. Following is a summary of comments from the panelists.

Good yields, strong 2023 farm incomes, a shortage of farmland for sale and moderating interest rates have farm real estate experts optimistic about keeping land values at current high levels heading into 2024.

At DTN's virtual Ag Summit, farmland specialists were in general agreement about steady farmland values for 2024.

"We had some exceptional yields this fall [2023]," says Howard Halderman, president of Halderman Farm Management. The business is based in Wabash, Indiana, and oversees farmland assets in 22 states. "That, combined with the potential for declining interest rates layered on top of soybean prices hanging in there at a high level, I think we're in for steady land values at these high levels through 2024," he explains.

In the Delta, where land values haven't risen as fast as in the Corn Belt the past three years, it's still a seller's market, points out Jeramy Stephens, partner and managing broker for National Land Realty, in Little Rock, Arkansas. Land-buying interest remains strong for top-quality cropland and marginal cropland with a high recreational value influenced by duck hunting.

From 2020 to 2023, farmland values jumped 30 to 40% in Illinois, Indiana and Iowa, according to USDA. During that same period, cropland in Arkansas, Louisiana and Mississippi increased only 10 to 11%.

That's part of why the Delta still attracts investment buyers. David Martin, managing director of US Agriculture, a farmland investment adviser based in Indianapolis, Indiana, told Ag Summit attendees that his firm is looking for investments in the Delta region during the next three to five years.

"You can buy Arkansas farmland for $6,000 per acre, which is about half of what Midwest farm values are today. But, you can achieve 80 to 90% of the corn and soy yields at half the cost, especially given some of the soy dynamics that we're seeing in the marketplace developing with renewable fuels," Martin explains.

In 2022, farmland values hit all-time highs, both nominally and adjusted for inflation, Halderman says. Indiana uses a soil productivity scale called weighted average productivity index (WAPI). According to cropland sales by Halderman Farm Management, land prices based on the index have been hanging around $80 to $90 per corn bushel, taking the sales price divided by the estimated corn bushels that soil averages.

"It's now on the low end of that, around $80 in 2023," he continues. So, while land values are not making new record highs, the market still has underlying support.

HIGHER INTEREST RATES WEIGH ON SALES

High interest rates -- 7% for term debt and 8 to 10% for operating loans -- negatively affect the farmland market, says Martin, whose investment company owns some 60 farms in 14 states producing 20 different crops. But, the effect isn't that immediate.

"Mortgage debt is long term, and most farm owners have locked in low interest rates. So, only the new debt is experiencing higher interest rates," Halderman advises.

The last time rates shot higher like this was in the 1980s, when farm operations paid an average of 35 cents in interest expense for every $1 earned in farming, he points out. Today, that's only 12 to 15 cents in interest expense for every dollar earned in farming.

A study by Iowa State University shows as much as 84% of Iowa farmland has no mortgage debt. "That's probably consistent around the Corn Belt," he adds.

Christian Lawrence, a cross-asset strategist focusing on currencies and interest rates for Rabobank, expects the Federal Reserve will cut interest rates by 75 basis points in 2024, although it might not start lowering rates as quickly as some might want. Lawrence, also a speaker at the DTN Ag Summit, shared his insights on possible future actions by the Federal Reserve.

"Recently, we've seen the market get very optimistic that the Fed is going to start cutting rates," he says in his presentation, adding that many are calling for the first cut in March. Instead, he thinks the Fed will start taking action to lower rates in the middle of next year, citing "sticky" inflation pressures and forecasts that unemployment will be slow to rise even if the economy slows.

But, there's one point he wants to make clear: Rates are not returning to zero. He anticipates a return to the pre-Great Recession standard, something more like 3.5%. While that's still below current rates, it will mean that future farmland buyers will need to budget higher interest expenses into their offers.

CASH RENTS OUTLOOK

"Cash rents generally lag land values," Halderman says. Even if land values decline, rents don't go down as quickly, and when land values climb, cash rents rise more slowly. "At Halderman, we manage 700 farms, and our rents are still experiencing a lot of strength going into 2024," he says.

Stephens says cash rents in the Delta are around $225 per acre. "We've seen $250 to $275 per acre with some rents pushing $300. But, for the most part, the top for the best cropland is $250 per acre. Flex rents for quality land are generally $200 cash rent plus a flex," he adds. For B and C cropland, cash rents range from $150 to $175 per acre.

WATCH THESE FACTORS

On the plus side, fertilizer, pesticide and energy costs continue to come down, making profit and loss look better for 2024 row crops, Martin notes. And, the general low supply of farmland coming to the market for sale props up land values.

What would cause land values to drop? "If we saw $4.25-per-bushel corn for an extended period or soybean prices decline to $11 per bushel, farm incomes would take a hit, and that would pressure land values," Halderman explains. The University of Illinois estimated 2024 corn/soybean budgets for the state's farmers at $5-per-bushel breakeven for corn and $12-per-bushel breakeven for soybeans.

He says that commodity prices could sink if South America has a large crop, geopolitical problems worsen, and the global economy slows down. "Then you could see a 10 to 15% decline in land values."

If there is not a supply shock, Martin anticipates neutral appreciation rates for the next couple of years in farmland values.

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-- To view the entire DTN presentation on land values, visit https://www.dtnpf.com/…

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