The farmland market and the agricultural economy have seen a remarkable ride over the past year—the world shut down in early 2020 with unprecedented uncertainty and anxiety; however, the agricultural commodity markets and the land market have gained noticeable strength since fall 2020. Record government support, historically low interest rates, and surging agricultural exports led to a near-10% hike in farmland values for almost all Midwestern states.
Table 1 presents the two most recent quarterly surveys of agricultural lenders by the Federal Reserve Banks of Kansas City and Chicago. Non-irrigated cropland values in Kansas, western Missouri, and Nebraska saw 8%, 12%, and 8% growth, respectively, from the first quarter of 2020 to the first quarter of 2021; and Illinois, Indiana, and Wisconsin also saw 4%, 8%, and 8% annual growth, respectively, since April 2020. Focusing on Iowa, according to the May 2021 Chicago Fed Ag Letter, on average, “good” Iowa farmland saw a 4% increase from January 1, 2021, to April 1, 2021 (Oppedahl 2021), which represents an overall 10% increase from April 1, 2020, to April 1, 2021. Across Iowa, Northeast Iowa saw the most significant hike—7%—since January 2021, whereas central Iowa only grew 1% in the first quarter of 2021.
|Kansas City Fed Ag Credit Survey|
Q1 2020 to Q1 2021
|Chicago Fed Ag Letter|
April 2020 to April 2021
|States||Non-irrigated Cropland||Irrigated Cropland||Ranchland||States||“Good” Farmland|
|Tenth District||+8%||+8%||+8%||Seventh District||+7%|
Put simply, land value equals income divided by interest rate. The recent increase in land value is largely attributable to record-level federal ad hoc payments, drastic cuts in interest rates by the Federal Reserve, recent surges in agricultural exports and the resulting commodity prices, and limited land supply. Thanks to the strong government payments and late-fall surges of Chinese agricultural purchases, cash corn and soybean prices in March 2021 are 33% and 56% higher, respectively, than one-year-ago levels. At the same time, over the past year, only 72,275 acres of Iowa farmland were sold at auctions, suggesting a tight supply in the land market. The limited land supply situation probably will remain even with rising concerns about estate tax reforms, 1031 exchange, stepped-up basis, and capital gains taxes for farmland sales. Our recent research further shows that the large cut in the interest rate in 2020 by the Federal Reserve will fully offset the 2015–2018 interest rate hikes, and the net effects of interest rate changes on farmland values will become positive beginning in 2021 (Basha, Zhang, and Hart 2021).
The Iowa and Midwest farmland markets have been in modest decline since the 2013 peak, and the land values in Iowa have been fairly steady for the past three-to-four years before this recent ramp-up. Although the current land values are still less than the 2013 peak, the surging crop and land prices offer optimism to landowners, producers, and agricultural professionals, and once again proves the resiliency of agricultural real estate values. On May 19, 2021, after the cancellation of the 2020 conference due to COVID-19, we held the 93rd Soil Management Land Valuation (SMLV) conference virtually via Zoom. Following the annual tradition since 1964, we invited conference attendees to provide estimates on land value trends and crop prices in an online survey. We received short- and long-term estimates for land and crop prices from 124 agricultural professionals (see table 2). For each observation, we calculated the yearly percent change from the respective May 2021 estimate. We did this transformation because the percentage change estimates are more transferrable than land value estimates with other data sources.
|Percent change in LV from May 21 to Nov 21||122||5.7%||5.3%||-9.1%||27.3%|
|Percent change in LV from May 21 to Nov 22||119||9.2%||8.7%||-16.7%||36.4%|
|Percent change in LV from May 21 to Nov 23||119||11.0%||11.3%||-25.0%||45.5%|
|Percent change in LV from May 21 to Nov 25||120||19.7%||16.3%||-15.0%||75.0%|
|Percent change in LV from May 21 to Nov 40||115||55.7%||43.1%||-10.0%||212.5%|
|Estimated cash corn price May 1, 2021||119||$5.90/bu.||$0.65/bu.||$4.05/bu.||$7.60/bu.|
|Estimated cash corn price Nov 1, 2021||119||$5.29/bu.||$0.83/bu.||$4.00/bu.||$8.00/bu.|
|Estimated cash corn price Nov 1, 2022||117||$4.92/bu.||$0.98/bu.||$3.50/bu.||$8.50/bu.|
|Estimated cash corn price Nov 1, 2023||113||$4.85/bu.||$1.15/bu.||$3.50/bu.||$9.00/bu.|
|Estimated cash soybean price May 1, 2021||121||$14.00/bu.||$1.22/bu.||$8.80/bu.||$16.50/bu.|
|Estimated cash soybean price Nov 1, 2021||119||$12.93/bu.||$1.40/bu.||$10.00/bu.||$16.50/bu.|
|Estimated cash soybean price Nov 1, 2022||115||$12.14/bu.||$1.91/bu.||$9.00/bu.||$20.00/bu.|
|Estimated cash soybean price Nov 1, 2023||113||$11.89/bu.||$2.31/bu.||$8.00/bu.||$20.00/bu.|
Overall, agricultural professionals expect a continuation of the growth spree in farmland values in their local service areas over the next 18 months. In particular, they forecast an average 5.7% increase in land values from May 1 to November 1, 2021. They further expect land values to rise by 9.2% from May 1, 2021, to November 1, 2022, which shows an expected increase in land values from November 1, 2020, to November 1, 2021. Furthermore, respondents project the land market to continue to stay stable and gradually increase from 2022 to 2023. Using a national sample of 400 producers, the Purdue University Ag Economy Barometer reported in May 2021 that 63% of the surveyed farmers expect higher farmland prices in their area 12 months ahead (Purdue 2021).
The respondents to the SMLV survey have a rosier outlook for long-run land values—in particular, they expect, on average, a 19% increase in land values from May 2021 to November 2025, and a 56% increase in land values from May 2020 to November 2040. This echoes with the facts that farmland is typically a long-term investment and that half of land in Iowa is held by the same owner for over 20 years.
Respondents also provided estimates for cash corn and soybean prices for the near future and forecasted a weakening of crop prices, especially when compared to May 2021 price levels. In a typical marketing year, and 2020 was not a typical year, crop prices enjoy a spring rally due to weather or planting concerns, and then have lower price levels during harvest time, which is likely behind the rationale for the lower November 2021 price estimates. Interestingly, the respondents are more pessimistic about the cash corn and soybean prices in 2022 and 2023, in part due to smaller projected government payments and rising production costs. In other words, the continued optimism of land values did not get reflected in the crop market outlook, which uses the futures markets as the benchmark.
Finally, respondents provided cash rent estimates for the corresponding time horizon, for which we calculate the gross capitalization rates for the land market as respondents’ gross cash rent estimates divided by land value estimates. Overall, estimates show once again that respondents expect the gross capitalization rates to be stable at around 3.1%–3.2% from now to 2040. With the rising land market, the recent May 2021 ISU Cash Rent Survey shows that the average Iowa cropland cash rents rose 4.5% to $232 per tillable acre (AgDM 2021).
Only time will tell whether we will see a continuation of the recent strong growth of the farmland market. With rising concerns for inflation, many investors are increasingly interested in buying farmland parcels. Low interest rates and low land supply also tend to support land values as well. At the same time, uncertainties surrounding capital gains and estate tax reforms, rising production costs, and possible uncertainties related to agricultural trade could dampen the prospects of agricultural income and thus land values. Almost a decade later after the 2013 peak, people are having rosy outlooks again about the growing farm economy with farmland as a steady bedrock.
Basha, A., W. Zhang, and C. Hart. 2021. “The Impacts of Interest Rate Changes on US Midwest Farmland Values.” Agricultural Finance Review forthcoming issue. doi: 10.1108/AFR-11-2020-0163.
Cowley, C., and T. Kreitman. 2021. “Farm Credit Conditions Show Additional Strength.” Federal Reserve Bank of Kansas City.
Iowa State University Extension and Outreach Ag Decision Maker (AgDM). 2021. “Cash Rental Rates for Iowa 2021 Survey.” FM 1851, Iowa State University Extension and Outreach.
Oppedahl, D. 2021. AgLetter: May 2021. AgLetter No. 1992, Federal Reserve Bank of Chicago.
Purdue University and CME Group (Purdue). 2021. “Ag Economy Barometer.” Purdue University and CME Group.
Zhang, W. 2021. "Will Iowa Farmland Values Continue to Rise?" Agricultural Policy Review, Spring 2021. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=125.