Farmland Values in 2023: Steady Growth Amidst Rising Costs and Interest Rates

The Kansas City Fed’s August 2023 report highlighted that farmland values have seen a modest easing compared to 2022 but have continued to rise by an average of 7%. Bruce Sherrick, a professor at the University of Illinois, equated the value of farmland to gold, emphasizing its enduring investment appeal due to steady long-term returns and tax benefits.

Two primary factors drive the current farmland market:

1. Interest Rates: The Fed reported an average fixed interest rate on farm loans at just above 8%, marking a slight increase from the previous quarter. Paul Sadig from Farmers National Company highlighted that while interest rates hadn’t immediately impacted land prices, their effects are becoming more evident. The rising loan activity implies that farm operators are choosing to take on loans, despite having less cash on hand for major expenses like land purchases.
2. Opportunity: The majority of farmland sales involve farm operators, with 80% of Farmer’s National’s real estate transactions made by them, a statistic unchanged from 2022. However, with fewer land properties available for sale, the competition intensifies when a piece becomes available, impacting its value.

For potential buyers, Sadig stressed the importance of thorough evaluation before making a purchase. Factors like drainage and erosion issues can drastically affect the value of the land. Conversely, sellers are currently in a favorable position with some farmland prices reaching as high as $30,000 per acre. For these sellers, Sadig emphasized the importance of considering tax implications during land sale discussions, given potential capital gains tax consequences.

Looking forward to 2024, Sadig’s attention is on the “I” states, known for their competitive land markets. He believes that any significant shifts in land market trends will likely originate from these states.