Farmland Values and Fed Policy Risks

OMAHA (DTN) -- At least a couple of cuts in the Fed interest rate are likely in 2024, offering short-term support for farmland values; but the astounding growth in land values remains susceptible to a 1980s-like crash as the country's long-term debt problem looms.

Speaking Tuesday at the Land Investment Expo in Des Moines, a pair of former presidents of the Federal Reserve Bank of Kansas City raised concerns about the national debt, the Fed's increased role in credit markets, and the risk of a financial crash as a result.

Until this potential crisis hits, farmland remains a valuable investment and the "possibility of one or [two] rate cuts in 2024 is pretty high" to avoid a recession, said Tom Hoenig. Now a senior fellow at George Mason University, Hoenig led the KC Fed from 1991-2011.

Hoenig spoke at the Land Investment Expo with his successor, Esther George, who was president and CEO of the KC Fed from 2011 until last year. Initially talking about whether the U.S. economy will have a "soft landing," George said inflation remains a challenge for the central bank.

"That bump right now in inflation is still too high," George said. "Yes, it's been coming down and that really creates a dilemma for the Fed on how long to keep its interest rates high, when it can begin to back off, and I think that creates a lot of uncertainty," George said. "It certainly would create uncertainty for a group like this when thinking about land values and financing."

Hoening said one of the factors that influences land values is the amount of money the Fed has printed in the last four years. The Fed continues to increase the money supply in the economy, though it has slowed down. Investors continue looking for places to put that money in the economy, which is a driver for a range of investments from cryptocurrency to farmland.

"If you are going to put your money somewhere you are going to put it into an asset that has a better chance of appreciating or holding value for a long time," Hoenig said of land investments.

HISTORIC LAND VALUE INCREASES

The rise in farmland values over the past three-plus years has been "astounding," said Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois.

He pointed to three-year rates of return in farmland values that include yearly average gains of 19% in Kansas; 18% annual growth in Nebraska; 16% in South Dakota; and 15% in Iowa. Other strong performers for land values included North Dakota and Indiana at 14% average yearly increases and Minnesota at 13%.

"We just came through a period of time where much of the land in this country is up 50% to 60% from only three, three and a half years ago," Sherrick said. "That's an astounding feature."

He added, "There are gains that have been just unprecedented against history."

In comparison, the S&P 500 over the past three years is up about 26%.

Printing money has been a factor in those rising land values. Sherrick pointed to trade-aid payments under the Trump administration, followed by pandemic payments. Commodity prices were then boosted as world trade recovered from COVID. The war in Ukraine then added to the price increases for commodities, Sherrick said.

"We had all of these things that added to the farmers' ability to buy their neighbors' land," he said.

Farm income is coming down from highs in 2022, but Sherrick noted, "It's going to be down from a record, but it's not going to be low."

Farm programs will remain, and more investment will come into agricultural land through wind, solar, carbon pipelines, carbon-credit payments and other green investments that will add more revenue streams.

"We have a whole bunch of these coming and I don't know how to sort them out, but none of them look bad for agriculture," Sherrick said.

Hoening also referenced the likelihood of new cash flows coming from income streams tied to a green economy that will help support land values.

A risk, Sherrick said, is in trade policy, especially if trade wars return. "Tariffs and trade wars hurt both sides, and they especially hurt a primary exporter, which in agriculture would be us," he said.

ENORMOUS FISCAL BALLOON

The global geo-political challenges right now include both cold wars and hot wars that will further fuel U.S. defense spending, while interest on the national debt is going to be hitting $2 trillion a year. Combined with government entitlements, Hoenig said the country faces an "enormous fiscal balloon" while the Fed is trying to clamp down on inflation. Hoenig said that's going to put upward pressure on interest rates.

"The Federal Reserve is going to be put into this incredible bind," Hoenig said. "On the one hand, if they keep their balance sheet tight and keep interest rates higher to bring inflation down, they will slow down the economy."

He added, "On the other hand, if they ease too soon and begin to accommodate the needs of the federal government for spending and print more money, inflation will go up. So how are you going to balance that?"

SCARY LONG-TERM VIEW

All of this leads to "so much uncertainty out there right now," over how Fed moves will affect farmland or other real estate, as well as manufacturing and the economy overall, Hoenig said.

The growing annual federal budget deficits are going to eventually slow down the nation's economy. Hoenig pointed to Congressional Budget Office (CBO) projections that the national debt will move from $34 trillion to $55 trillion over the next decade. The federal deficit will become 7.5% of gross domestic product. Spending so much just to satisfy government debt payments will slow the growth of the economy.

"That means your nation's productivity falls, and wealth falls, and that's the long-term consequence of this and the Fed has to know that," Hoenig said.

Farmland values will increase until a crisis occurs. Depending on how much debt leverage is in the economy, "then we have the 1980s all over again," Hoenig said. "Again, that's a scary long-term view."

Hoenig and George both said Congress has to stop relying so heavily on the Fed to deal with multiple crises over the past 15 years to keep printing money without restraining federal spending.

"You heard this phrase throughout the financial crisis, 'The Fed is the only game in town,'" George said. "And it was a phrase that meant the Fed will act and the Fed ... does not want to see instability in the economy. The Fed will act and Congress will let it act, and you saw this more recently with the pandemic."

George highlighted the Fed's purchase of corporate credit markets and municipal bonds, all done with good intentions, but reflecting a continued expansion of the Fed's role.

"When you begin to expand the footprint of the central bank, one of the real tenets you have to watch is that the central bank has to be independent of those bodies, although completely accountable to Congress," George said. "So, the risk is you lose that independence just by default in doing that. As Tom said, you don't want the people spending the money to be directing the people who print the money."

George added the Fed "has been called on to act too much," and now has a footprint that includes mortgage products as well as buying U.S. Treasury securities. "It's an uncomfortable place for the Federal Reserve to be in."

More land value coverage from DTN:

"Land Price Conundrum: 4 Considerations from Reader Responses,"

https://www.dtnpf.com/…

"Recent Farmland Sales in Iowa, Kansas, Kentucky, Michigan, North Carolina, North Dakota," https://www.dtnpf.com/…

"Iowa Land Values Set Record in 2023," https://www.dtnpf.com/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on X, formerly known as Twitter, @ChrisClaytonDTN

(c) Copyright 2024 DTN, LLC. All rights reserved.