Farmland Prices Expected to Stay Strong in 2023

Despite rising interest rates and higher input costs, the farmland market across the Midwest remains strong, although not quite as robust as last fall.

"You can still have a record land sale, but not every sale will set a record," says Doug Hensley, president, Hertz Real Estate Services, based in Nevada, Iowa. "The land market is not backing off, but it is going up at a slower pace than last year; and in some places, it is leveling off."

Paul Schadegg, senior vice president of real estate, Farmers National Co., Omaha, Nebraska, concurs. "About the time we say we've seen our last record sale, another one pops up."

At the end of October in southeast Nebraska, a 116-acre farm sold for $27,400 per acre, with the price driven up by two local farmer/businessmen who both wanted the tract, he says.

"Good land continues to attract a strong amount of interest from buyers," Schadegg continues. Although investors engage in the bidding, 90% of the top auction bids at Farmers National auctions are won by owner-operator farmers, he explains.

INCENTIVE TO EXPAND

"With commodity prices remaining strong, farmers continue to have the incentive to expand," Schadegg adds. "They've seen some pretty impressive returns the past couple years. And, even in places where there was a drought this year [2022], yields have come in better than expected."

University of Illinois calculations show that in 2021, Illinois farmers had a return of $477 per acre, factoring a yield of 211-bushel-per-acre (bpa) corn and a price of $6.50 per bushel. In 2022, return per acre of corn in Illinois is predicted to be $193, with a 215-bpa corn yield at an average price of $5.80. This year, the University of Illinois forecasts farmers' profit on an acre of corn ground will drop to minus $11 per acre because of direct costs rising 45% and machinery costs increasing 26% from two years ago.

It's still a red-hot farmland market in Indiana, says Howard Halderman, president, Halderman Farm Management and Real Estate Services, Wabash, Indiana. He likes to look at farmland based on its Weighted Average Productivity Index (WAPI) using corn bushels per acre. From 2016 to 2020, farmland sold for about $50 per bushel of WAPI. So, if a farm had a WAPI score of 150 bpa, it would sell for $7,500 per acre ($50 multiplied by 150 bpa).

In the first half of 2021, Halderman says, sales of cropland (excluding woods and pasture) brought $55 per WAPI. In the second half of last year, that shot up to $80 per WAPI, for an average of $71 per WAPI for the whole year.

In 2022, based on actual cropland sales, Halderman reports these monthly average values: February: $85 per WAPI bushel score; March: $87 per bushel; April-July (a slower time of year for land sales): $77 per bushel; August: $92 per bushel; September: $95 per bushel; October: $98 per bushel. The average for the year so far is $87 per bushel WAPI score.

"That equates to a farm sale bringing $12,270 per cropland acre that has a WAPI yield score of 141-bushel corn per acre (141 bpa multiplied by $87 per bushel)," Halderman explains. "We had a recent sale of $12,300 per acre on a farm that equaled $85 per WAPI, and the seller was pleased."

INCREASING INVESTOR INTEREST

"Historically, farmland has been a great inflation hedge. In fact, the correlation is 1-to-1," says Steve Bruere, Peoples Co., Clive, Iowa. "And, we've seen investors being the high bidder at some farmland auctions."

At Peoples Co. Auctions, the percentage of buyers who are farmers has shifted from about 70 to 50 to 60%.

"While farmers continue to buy most of the farmland, we're seeing more investor involvement," says Nate Franzen, president, ag banking division, First Dakota National Bank, Yankton, South Dakota. "As people worry about a coming recession, farmland is seen as a safe haven."

INTEREST RATES NOT A FACTOR

Higher interest rates haven't really been much of an issue in farmland sales up to now, Bruere explains. "And, that surprised me, but there is a lot of cash out there. Incredibly strong commodity prices have outpaced the effect of increasing interest rates. But, going forward, that could be a real challenge for people using leverage for land purchases."

Franzen says that whether a farmer can lock in 5% interest or 6.5 to 7% interest is not entering the decision-making process.

"Profitability is stable to strong. That's been the main motivator in the land market," he says. "We continued to see new record sales across the board this past fall."

Some buyers may become more cautious as interest rates climb, Halderman adds. One potential buyer told him, "Maybe I'll just buy CDs [certificates of deposit]."

Interest rates are not historically high, but they are three times higher than last year, he points out. "A farmer with cash may consider a 2.5 to 3% CD competitive with the current return on a farm, although that doesn't take into account potential capital gain on the land."

MORE BUYERS THAN SELLERS

"It amazes me that there are still more buyers than sellers," Schadegg says. "And, we are setting a new record for real estate sales in our company's 90 years of operation, not only because of higher prices, but the number of transactions is up, and the number of acres sold is up." The company's auction calendar is actively booking auctions for 2023, Schadegg reports.

Sellers are motivated because they see an opportunity to sell at record prices, although Schadegg cautioned there is the drawback of capital gains taxes. Yet, even with all the sales, stronger buyer interest remains.

CAUTIOUS OPTIMISM AHEAD

"Farmers don't expect these returns to continue forever," says University of Illinois agricultural economist Gary Schnitkey. Brazil planted a record number of acres in 2022, and good yields could occur in the U.S. in 2023, rebalancing the global supply and demand picture. Continued high input costs weigh on profits. A recession could cut demand. High prices don't last forever, Schnitkey concludes. More of Schnitkey's thoughts can be seen at https://bit.ly/….

However, there's a lot to support the farmland market, too. To start, the majority of land is owned debt-free. Farmers expect strong returns. A lofty harvest price option for crop insurance will boost indemnities for those in drought areas. Farmers have the ability to lock in profitable prices for 2023. But, still, most farmland experts expect the pace of farmland price increases to plateau or slow to around 10 to 15% year over year in 2023.

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