AgLetter

AgLetter Insights: Agricultural Land Values Reach New Peak in 2022

Seventh District agriculture is in a strong position, with farmland values at record levels, according to the fourth quarter 2022 issue of the Chicago Fed AgLetter. David Oppedahl, AgLetter author and policy advisor at the Chicago Fed, shares his thoughts on farmland values, crop revenues, and other topics covered in the latest issue. He also discusses the accessibility of farmland to beginning farmers—which was one of the main topics explored at the most recent Midwest Agriculture Conference, held in late November 2022.

Q: 2022 was a record year for crop revenues. What were the reasons behind this increase?

A: The primary reason was the rise in corn and soybean prices that occurred during 2022. They were still up in December 2022 from where they were a year ago. That increase was more than enough to offset a small decrease in the production of corn and soybeans in our District.

Q: One interesting point in the AgLetter was the avian influenza’s impact on poultry shortages and egg prices. Did similar shortages have an impact on revenues in 2022?

A: Some products—eggs in particular—had a restricted supply because of the avian influenza, which is reflected in the higher prices. But the overall trend in agricultural prices may have been decreasing toward the end of the year. The World Food Price Index from the Food and Agriculture Organization of the United Nations has been declining for ten months in a row. But prices were still high for corn and soybeans, as last year’s output from South America faltered. Beef prices could still be rising, although pork prices have been coming down. Individual products will have individual supply and demand markets, but there’s an interrelated dynamic between them.

Q: Do you see this continuing in 2023?

A: Well, that's a little bit of a challenging question. Things are uncertain right now with the continuing war between Russia and Ukraine, as well as China’s recovery path from Covid and its economic slowdown. There’s potential for crop prices to rise again in 2023, but after a strong last couple of years, they could decrease a bit.

Q: Is that uncertainty playing a role in farmland values? What were the biggest factors driving the annual increase of 12 percent?

A: There’s optimism from both farmers and nonfarm investors, who are competing for ground that becomes available. And there’s not a huge amount of land that’s up for auction or sale. So, when they see there’s a limited supply, it can lead to bidding wars, which have driven up farmland values overall. The uncertainty in the world may have taken a little of the shine off, but it’s not a major impediment to higher agricultural land values.

Q: It seems the share of loans with major or severe repayment problems is down—in fact, it’s lower than has ever been reported in any final quarter. What’s driving that?

A: Farmers have been able to repay their loans at a very high rate. Overall rates of repayment have been better than a year ago for nine quarters in a row. A decade ago, we had a very strong period of repayment rates; eventually, repayment rates tailed off, and then it was tougher for about a seven-year period. Now, however, with government funding, plus higher crop and livestock prices, farmers have been able to repay their loans at a much higher rate, so repayment rates are rising and the percentage of problem loans is falling. There’s a very small share now with severe or major repayment problems, even though interest rates have been moving up.

Q: And would you say that has contributed to some of the optimism farmers are feeling?

A: Yes. When you're able to pay your loans and have more left over, that's always got to feel good. And with a strong cash flow, it’s helping with the feeling that there’s a chance to have a good year. Obviously, 2023 will be determined later with production; we haven’t even gotten to planting yet. That said, it seems farmers are looking to have a third good year in a row, even if it’s not as good as the previous two years.

Q: How did bankers see farmland’s valuation in the fourth quarter?

A: Almost two-thirds of responding bankers thought farmland was overvalued, and only 1 percent saw it as undervalued. It does seem like bankers are expecting a slowdown—at the very minimum—in the near term. In the longer term, there may be some potential for softer farmland values.

Q: So, what does the fourth quarter and the end of 2022 say about the state of Seventh District agriculture?

A: Seventh District agriculture is in a strong position right now, with farm assets as large as they’ve ever been. Farmland values are at record levels. And although rising costs, such as those for fertilizer and energy, have caused concerns, they didn’t seem to have as large an impact as feared in 2022. Some of the prices for those key components won’t be as sticky, which could lead to lower costs in 2023. At the same time, given the strength of incomes in 2022, landlords will have expectations for higher cash rents; there are already reports of very high auctions for renting farmland. It seems like some farmers are optimistic that they’ll be able to pay higher rents for the land they farm and still be able to maintain a profit.

Q: At the conference, there was a focus on accessibility for new farmers. Will these higher cash rents and auctions create a greater barrier?

A: Certainly, there’s an ongoing concern about the availability and affordability of agricultural ground for beginning farmers. Outside investors will typically use a service to offer their land for farming, and there will be competition within the local area between farmers who want to plant and harvest that ground. And when you have competition, and outside investors are interested in offering their ground, it can create a shift in who’s farming what. That said, I expect it not to change that much from the past, which makes the situation tougher for newer farmers. However, there are organizations working to improve the opportunities for beginning and minority farmers.

For the latest data and insights, read the fourth quarter issue of AgLetter.

Data on credit conditions at Seventh District agricultural banks and on farmland values in the Seventh District are available for download as spreadsheets. Recent data for credit conditions are also available on the third page of the AgLetter.

Seventh District Credit Conditions
Seventh District Land Values