This is the first in a series of three articles evaluating the relationship between farm income, interest rates, and other factors and land values. The second article is available here and the third article is available here.
The Iowa land market has experienced significant fluctuations over the past century, marked by three golden eras—in the 1920s, 1980s, and early 2010s—with each characterized by a significant surge in farm incomes and land values. The first two golden eras ended with marked crashes in land value, while the last ended with a less drastic market adjustment. Recently, the COVID-19 pandemic triggered another such surge, inevitably drawing comparisons to these golden eras and raising questions about the potential for a subsequent decline. In 2023, however, the rate of increase slowed noticeably, with a nominal growth of 3.7% and an inflation-adjusted increase of 0.5%. This plateau indicates a less sustained rise in land values, highlighting a difference from previous golden eras, and has prompted questions about the future direction of the land market and the broader agricultural economy.
To begin with, this slower pace of growth, while unexpected to some, aligns with the predictions of approximately half the respondents to the 2022 Iowa State University Land Value Survey. These respondents expected land values to change modestly, ranging between a decrease of 5% and an increase of 5% from November 1, 2022, to November 1, 2023. The data corroborates these expectations, with most areas in Iowa witnessing increases or decreases within this margin, except for some southern counties where the land values rose by 10%, supported by recreational demand that is not directly affected by the changes in the agricultural economy.
Moving forward, the sentiment for 2024, as captured by the 2023 survey, suggests a cautious outlook. Over two-thirds of the respondents (70%) consider the current land values to be either “too high” or “way too high,” and approximately half of the respondents anticipate a market adjustment in the near future, with declines in land values in 2024 by up to 10%. Some of that movement seems to have begun already—the February 2024 edition of Chicago Fed’s AgLetter reports a 2% decrease in Iowa’s farmland values over the last quarter of 2023 and a 1% reduction over the entire year (Oppedahl and Kepner 2024).
Overall, land market dynamics are guided by a single valuation principle: the value of land today is the present value of all expected benefits it will provide in the future. Therefore, we can define land value as net income divided by interest rate. This equation simplifies the movements of the land market to two pivotal factors: net farm income and interest rates. Through this lens, the recent hikes in land values can be explained by record-high farm incomes and historically low interest rates. Similarly, we also need to look towards the outlooks for both of these factors to form expectations about the future of the land market. We will begin with a closer look at net income projections for 2024 and beyond.
USDA’s World Agricultural Supply and Demand Estimates (WASDE) provides short-term forecasts for agricultural markets over the next year. The February 2024 WASDE forecasts indicate a tightening in the farm economy, exerting negative pressure on net farm income. For instance, livestock markets expect mixed outcomes, with a decline in beef production but increases for pork, broilers, and turkeys. This variability in production and prices, alongside projected increases in corn production and downward adjustments in crop prices, suggests a potential decline in overall agricultural prices and, by extension, farm incomes in 2024 (Schulz and Hart 2024).
Figure 1 shows that the February 2024 forecast pegs net farm income at $116.1 billion in 2024, which is a fall of 25.5% from 2023, continuing a trend from the previous year’s 16% decrease. Despite this, net farm income until 2023 remained above the 20-year average, mitigating immediate downward pressure on land values. While realized net farm income has dramatically increased and is now in decline, it is interesting to note that the longer-term projections for net farm income have also shifted significantly. Figure 2 illustrates how the 10-year USDA baseline projections for net farm income have changed over the pandemic. Note that the net farm income projections set in 2023 and 2024 begin at a much higher estimate for net incomes, which are expected to fall for the next 3–4 years until stability and an upward trajectory are regained. Throughout the 10-year horizon, however, projected income is at a higher level than that expected in 2022 or earlier. Moreover, while the 2024 projection for 2030 net farm income is lower than it was in the 2023 projections, it is still roughly $30 billion higher than the 2022 projection. This positive movement in projected net farm income helps maintain higher land values, even with the lowering of those projections in the most recent set.
Note: F=forecast; data for 2023 and 2024 are forecasts. Values are adjusted for inflation using the US Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product Price Index (BEA API series code: A191RG) rebased to 2024 by USDA Economic Research Service.
Source: USDA ERS (2023).
Note: Each line shows the projections made in the report year mentioned at the start of the line and provides projections for 10 years into the future.
Source: USDA ERS (2023).
Why does the expectation of higher farm incomes matter for land values today? Because the prospects for higher incomes, as well as appreciation in land value, are bid into purchase prices. When farmers, investors, and landowners anticipate higher farm incomes in the future, they are generally more willing to pay higher prices for land today, barring cash or credit constraints. Over time, buyers in the land market have been willing to accept lower percentage returns, further supporting higher land prices. Figure 3 depicts the net capitalization rate for Iowa farmland since 1978. Since the peak of about 8% in 1985–86, the capitalization rate has been on an overall decline. As land values have continued to rise, the net capitalization rate has fallen to less than 2% in 2023. So, expectations about stable or less-drastically falling farm incomes should have a more pronounced role in supporting land values than they did before. That said, net incomes still exert a positive influence in the land markets, not a negative one, despite their falling trends.
Source: Iowa State Land Value Survey and Iowa State Cash Rental Rate Survey.
In summary, the Iowa land market is navigating through a period of uncertainty stemming from the uncertainty in the current agricultural market dynamics and future income expectations. While recent trends show a slowing in the pace of land value increases, the underlying fundamentals – net farm income and interest rates – determine the future of land values together. What we can say for certain is that the expectation of higher farm incomes in the future, despite current downturns, maintains a positive influence on land values.
References
Oppedahl, D., and E. Kepner. "AgLetter: February 2024." Federal Reserve Bank of Chicago. Available at: https://www.chicagofed.org/publications/agletter/2020-2024/february-2024.
Schulz, L., and C. Hart. 2023. "Agricultural Projections Going into 2024." Agricultural Policy Review Fall 2023. Center for Agricultural and Rural Development, Iowa State University.
US Department of Agriculture, Economic Research Service (USDA ERS). 2023. “Farm Income and Wealth Statistics.” Available at https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/.
US Department of Agriculture, Economic Research Service (USDA ERS). 2023. "Agricultural Baseline Database." Available at https://www.ers.usda.gov/data-products/agricultural-baseline-database/.
Suggested citation
Chandio, R. 2024. “How Will Changes in Net Incomes Affect Iowa’s Land Market?” Agricultural Policy Review, Winter 2024. Center for Agricultural and Rural Development, Iowa State University. Available at: https://agpolicyreview.card.iastate.edu/winter-2024/how-will-changes-net-incomes-affect-iowas-land-market.