Farmland values resilient through pandemic, poised to grow
Farmland market proved once again this year that, even in a pandemic, it’s worth what it earns.
Values remain steady and even increased in some areas of the Midwest, including Illinois, in 2020.
And that trend could continue, according to Bruce Sherrick, director of the TIAA Center for Farmland Research in the Department of Ag and Consumer Economics at the University of Illinois. He discussed farmland values during the fifth and final webinar of the Illinois Farm Economics Summit.
“This has been quite a year. As we near the end of the year, the big question is, what’s coming up next,” Sherrick said.
“I think in the next four years there’s going to be more than a 5% increase (in farmland values),” he noted. “Income prospects going forward certainly support an increase in valuations by more than 1.25% per year.”
How can that be during times featuring such market volatility and uncertainty?
Sherrick looks for demand for feed grains and protein to grow; interest rates continue to track at historically low levels; investors remain interested in farmland, which relative to inflation has been fairly constant; and the low turnover rate of farmland (1.5% to 2% annually) increases competition for buyers when tracts do become available for purchase.
“It’s an asset whose capital appreciation has exceeded that of the rest of the economy,” Sherrick said of the farmland market. “You’ve heard of people who are land rich and cash poor. It can happen because land values did increase rather dramatically (within the last decade).”
A survey of members of the Illinois Society of Farmland Managers and Rural Appraisers estimated average land values across the state at $10,313 per acre for excellent productivity soil, $8,233 per acre for good ground and $6,350 per acre for average land as of August. Values ranged from up 3% to down 2.1% depending on location and soil type.
The story was similar in Iowa this year where farmland values increased by an average of 1.7%, according to Iowa State University’s annual survey. Values ranged from an average of $9,068 per acre for high quality land to $5,078 for low quality ground. A sale of 72 acres in Sioux County, Iowa, recently brought an eye-popping $14,300 per acre.
“I’m of the opinion we’re looking at a very rational farmland market,” Sherrick said. “We don’t expect the 1980s to recur.”
The ag sector currently holds about $3 trillion in assets with about 14% debt.
“We’ve heard a lot about increasing debt loads,” Sherrick said. “But, frankly, it’s not that high. If you look back to the 1970s, we were approaching 20%, 16% in the 1980s and 15% in the 1990s. We got to 10% to 14% only in the last decade when we had massive growth in asset values, which diluted the amount of debt.”
Looking ahead, the Federal Reserve signaled it’s likely to maintain interest rates at historically low levels for several years as the economy recovers from the pandemic.
The Fed cut the target for the federal funds rates by 1.5% since March 3, bringing it down to a range of zero to 0.25%. And low rates help support farmland values.
“Even if interest rates come back up, it doesn’t mean it will push farmland values back down,” Sherrick said. “It has much more to do with, are we going to maintain income?
“Demand for feed grains and protein looks strong in the future,” he added.
USDA surveys indicate farmland values began rising in 1988, and except for single year declines in 2009 and 2016, have continued to rise.