Land Investments Hold Long-Term Value

Why Land Values Last

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
Average U.S. farm real estate value, nominal and real (inflation adjusted), 1950-2023 (Sources: USDA, Economic Research service, National Agricultural Statistics Service, QuickStats)

Nathan Roux might be able to afford farmland if he wins the lottery.

"At that point, I don't know if I'd want to work that hard," he says.

The Army veteran didn't grow up on a farm, but he's fallen in love with the fieldwork through his career overseeing corn and soybean research plots for FIRST, a farmer-led organization that runs independent seed trials and publishes public results.

"Even if I had the itch -- like I really wanted to own my own ground and raise a crop -- it's unattainable unless you've grown up with it in the family or you have millions and millions of dollars or just incredible financial backing," he contends. "The ground -- I'm not even going to talk about the machinery -- the ground is just so expensive to buy. It will not pencil out."

It's not just people like Roux who are priced out. He says a 4,000-acre farmer he admires for his business acumen was repeatedly outbid by an investment firm that partnered with a different grower.

"If he can't afford it, I can't help but wonder if we've priced land so that only the biggest can afford to buy," he says.

COOLING DOWN?

The ferocity of Illinois' post-COVID farmland market is waning. According to the Chicago Federal Reserve, land values in that state climbed just 3% from July 2023 to 2024, the smallest year-over-year increase since 2020. In Iowa, farmland values declined 3% during the year.

Across the Corn Belt, economists are calling for farmland values to hold steady or make small adjustments in either direction.

Farmers, the largest group of buyers, are taking a cautious approach to capital expenditures after another year of tough commodity prices and lower incomes, says Howard Halderman, the third-generation president of Halderman Real Estate and Farm Management, based in Wabash, Indiana.

"Investors provide price insulation in downturns," he says, since they see softening prices as buying opportunities. Land values have mostly grown in a slow, steady manner since the 1930s. There have been a few periods of price spikes but only 10 or so years when prices declined, including the 1980s farm crisis. "It's a very steady asset."

STRUCTURAL SOUNDNESS

The financial structure of the farmland market is completely different than in the 1980s, and that makes it increasingly appealing to a wide array of investors, says Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois.

-- Federally subsidized, revenue-protection crop insurance didn't exist.

-- Banks no longer offer 40-year amortized loans covering 80% of the assets' costs with a 15% interest rate.

-- 70% of U.S. farmland is owned outright, limiting the odds of foreclosures flooding the market.

-- The federal funds rate is between 4.75 and 5% compared to 1980's peak range of 19 to 20%.

Sherrick says he doesn't mean to imply that interest rate changes aren't painful or that it's easy to borrow. "I'm just saying a systemically transmissible crisis is not going to be what triggers a drop in farmland values," he says.

POSITIVE DRIVERS

Sherrick says there are more positive drivers of farmland values than negative ones, especially viewed from a long-term perspective. "I used to talk about income, interest and inflation," he explains. "Now, I have to talk about energy and trade, too."

While interest rates are higher than a few years ago, he expects them to remain close to historical averages.

Farm incomes are down starkly from 2022's peaks, but USDA estimates that overall net farm income for 2024 will be in line with the 20-year average. "Income prospects long term are very good," Sherrick says. Population growth in Africa and India are expected to drive food demand as population and incomes grow, generating both more mouths to feed and higher demand for meat and feedgrains.

"You can't change where you grow food on the planet, because the soil is fixed. The water is fixed. What you can do is move it from where we grow it to where it's consumed," he says. That's why Sherrick thinks the largest risk to U.S. farmland values would be a disruption in global trade that hits export demand growth in the long term.

Halderman says land values in the Eastern Corn Belt are getting a lift from not only solar and wind energy, but also carbon storage leases. A recent Purdue University study found that if two identical parcels sold in the same year, the one closer to solar generation is expected to sell at a 1.4% premium for every mile closer it is to the facility. For highly productive ground, that premium goes up to 1.8% per mile, an indication that "utility-scale solar facilities place a stronger price pressure on more valuable land."

INVESTMENT APPEAL

Microsoft founder Bill Gates and the Mormon church may be some of the nation's largest landowners, but they hardly reflect the pool of farmland investors. The most common investors are local, wealthy individuals that want to add an inflation hedge to their portfolios, Halderman says.

The Illinois teachers' pension fund was one of the first groups of investors to buy farmland as an asset class. Now, a variety of large investment groups are active buyers, although Halderman says different investors have different goals.

Generally, investors are looking for returns and typically target properties with income potential of 3 to 4% or more, Halderman says. At present, cash rents compared to many Corn Belt land values put the cap rate around 2.5%.

Farmland's reliable appreciation also makes it a safer option than most other investments. Unlike equities, the supply of land is fixed, and how much comes on the market at any time is determined primarily by nonmarket factors, such as estate transitions.

"Here's the greatest punchline: Farmland as an investment has outperformed equities over the long run and provides better inflation protection," Sherrick says. "If you don't need current income, farmland can be more tax efficient, as well, with more of the returns from appreciation. I think that is why some people think farmland looks expensive. It's because it is priced how it should be priced."

OWNERS vs. OPERATORS?

A trend Sherrick has seen more of in recent years is farmers selling land to investors and renting it back with a long-term lease. The sale enables farmers to put capital to use in other areas of the business, like expansion or equipment, while maintaining their acreage base.

Roux says he can't begrudge anyone for wanting to get top dollar for their land, but he wonders if far-away investors care about the land the same way a farmer would. "If land is going for $20,000 an acre, it doesn't help the next guy get into farming," he says.

Sherrick argues that's where public policy intersects with the markets, and right now, the market operates on the assumption that the world needs more food. Commercial corn and soybean production have grown so large that not just anyone can start in farming and be competitive, just like not everyone can start a shoe factory and compete with Nike.

While he waits to win the lottery, Roux is OK that it's not his name on the side of the semitrucks hauling grain to the elevator. He gets plenty of rubberneckers looking at his three-row Gleaner combine used to harvest plots.

"I like getting out in the field and talking to my growers. It's like I'm farming vicariously through them," he says.

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Katie Dehlinger