AgLetter Insights: Farmland Values Continue to Rise in the Second Quarter
Seventh District farmland values continued to rise in the second quarter of 2023, but for the first time in two years they did not experience a year-over-year double-digit percent gain. This slower growth in agricultural land values, the softening in some key commodity prices, and rising farm loan interest rates make up much of the story told in the August 2023 issue of the Chicago Fed’s AgLetter. In this Q&A David Oppedahl, AgLetter author and policy advisor at the Chicago Fed, talks about the possibility of a return to “normal dynamics” for District farmland values, the impact of Russia’s policy change on Ukrainian grain exports, and the Chicago Fed’s upcoming Midwest Agriculture Conference.
Q: Since the first quarter, we've had new upheavals in the world's grain supply as Russia pulled out of the Black Sea grain initiative—which gave safe passage to ships carrying Ukrainian grain cargo. Has this had any impact yet locally, or are we more likely to see that discussed in the third quarter issue of AgLetter?
A: Technically it's more third quarter news, but at the same time, there was a lot of uncertainty in the second quarter around what was going to happen with the Black Sea deal. So its impact was there, primarily in wheat markets, but certainly for corn as well. The other part of the picture has been that South America had quite a big crop—especially in Brazil—this past year. These are competing factors, kind of going in opposite directions.
Q: You report that in June, corn, soybean, hog, and milk prices were all down from the previous year, ranging between 12 and 33 percent lower. And you also note the likelihood of “a major loss of farm revenues in 2023.” Are these factors collectively a sign of trouble or more like the market correcting itself?
A: I think it’s more back to the old adage “whatever goes up must come down” because in the past two years farm revenues and income levels have been pretty high. In nominal terms, they've been records. “The cure for high prices is high prices,” as the saying goes. Demand is reduced some when prices are so high.
Q: Despite some of these other pressures, farmland prices continue to increase. What happened to the price of Seventh District agricultural territory in the second quarter of 2023?
A: The District’s farmland values had a 9 percent increase from a year ago and a 3 percent increase from a quarter ago. So these are still fairly healthy returns on farmland. But at the same time, it was the first time we've had a year-over-year percent gain that’s dipped below double digits in a couple of years. Some softening, but still increasing. I think it might just be that we’re starting to return to more normal dynamics.
Q: The great majority of your survey respondents are predicting stable land prices for the upcoming quarter. But you had one Iowa banker tell you there's some softening in the market for medium-quality farmland. And the majority of your respondents also say that they think District farmland is overvalued.
A: As interest rates move up and farm income levels come down, we could see these factors putting some additional stress on those who are purchasing farm ground. It would not be unprecedented for farmland values to give back a little of these very large gains that we've seen in recent years.
Most respondents think that farmland values will be stable in the near term. You know, if you look back to the decade prior to Covid, there were few annual gains after 2013 and more losses, especially in real terms, for farmland values. So, after this unusual period of large farmland gains, it wouldn't be too surprising if we were back to that generally stable scenario for a while.
Q: Your data show two things that it’s hard to hold in mind at the same time—that you’ve got the lowest level on record of loan repayment problems and then the highest loan interest rates since the third quarter of 2007. It seems like something's got to give.
A: Well, farm interest rates are still not that high in real terms, I mean after adjusting our survey data for inflation. They're just back to the levels they were at prior to Covid. When you see that nominal interest rates have risen so dramatically, you need to keep in mind that the burden really isn't as problematic yet until real interest rates have risen above current levels.
And then the other thing to keep in mind is that a lot of farmland is owned outright, so there isn't a mortgage on it. You’ve got relatively fewer mortgages on farmland than in the past, like in the farm crisis of the 1980s, for instance.
Q. Speaking of farmland, the Chicago Fed has its big annual Midwest Agriculture Conference coming up in November. Tell us what's being planned for this year.
A: We'll examine how most of farmland is still owned by farmers, but there are some investors of various sorts out there. And there's definitely a skew in the distribution toward elderly people owning farmland, which is kind of understandable given the low rates of inheritance and how long farmers keep working. So we'll be looking at those kinds of issues related to one of the most valuable assets of rural America.
Q: That's a strong topic. Is there a particular reason you wanted to examine it this year?
A: Several issues have been growing more serious lately. One includes the energy assets associated with farmland—whether it's wind towers, solar energy, the rights for a power line to cross over your ground or for something like a pipeline to run underneath it. And then also the ownership of farmland by foreign entities has been in the news. Even though it's a very small percentage of farm ground, it is something that Congress is taking a look at right now.
For the latest data and insights, read the second quarter issue of AgLetter.
