Higher commodity prices, strong farm profitability and low interest rates have put upward pressure on cropland values across the U.S.
Nationwide, those values were 7.8% higher in 2021 year over year, but the state-level increases varied from a high of 13.9% in Kansas to a low of 1.7% in Arkansas and Louisiana, according to USDA.
Many factors influence farmland values, said David Widmar, an agricultural economist and co-founder of Ag Economic Insights.
“The two big ones are income and interest rates,” he said.
That boils down to how much can be generated from the farmland and the return on the purchase of farmland, he said.
Low interest rates typically push farmland values higher as buyers are willing to bid up prices and accept a lower rate of return. When interest rates are higher, investors are looking for higher rates of return and, in turn, aren’t as eager to bid asset value up, he said.
“Current conditions are good for those looking to sell farmland,” he said.
“Another factor that is really relevant is local supply and demand” — the amount of farmland for sale and the number of buyers interested in purchasing it, he said.
There are also geographic factors. Drought and crop failures, especially if seen over several years, can affect local supply and demand. Local economic conditions and the commodity grown play into the equation as well, he said.
“Geographic trends do play out in local markets,” he said.
It’s helpful to remember there are national trends and local trends. They usually follow each other but can deviate, he said.
For example, the national trend shows a lot of interest in farmland and investment. But in some areas, there are a lot of farms on the market, but people aren’t interested, he said.
In general, low interest rates, strong outlooks for profitability and a lot of people wanting to buy farmland put upward pressure on farmland values in 2021, he said.
But “the farmland value hasn’t increased for all producers, all commodities and all regions,” he said.
Farmland values were up the most in the Great Plains and Corn Belt states, increasing by 13.9% in Kansas, 13.8% in Nebraska, 11.9% in South Dakota and 10.7% in Wisconsin.
Farmland values were up in the West and Southwest, but not as significantly — ranging from 0.7% in New Mexico to 9.3% in Idaho. Farmland values increased 7.4% in California, 6.1% in Oregon and 3.4% in Washington.
In 2022, he will be watching farm profitability. If strong profits on corn and soybeans slip, farmland values in those regions could decrease a little, he said.
He is also watching 10-year Treasury bonds. If the Federal Reserve raises interest rates significantly, farmland value could weaken, he said.
Farmland values have pretty much increased over the last 10 years, as much as 145% in North Dakota, 123% in South Dakota and 114% in Kansas.
But they haven’t increased as aggressively outside the Northern Plains and Corn Belt. They are up only 2.7% in Alabama and even down 5.1% in New Mexico and 0.06% in Alabama.
Farmland has been a good investment the past 10 years, but there’s no guarantee it will be forever, he said.