AgLetter Insights: Farmland Values Stay Strong Heading into the 2023 Planting Season

Coming off a banner year, Seventh District agriculture remains in a strong position. Farmland continues to gain in value, and a newer, variable method for determining farmland rents has spread, according to the first quarter 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 why rising interest rates haven’t damaged farm incomes or profitability as much as they might have, what might be keeping farm cash rents from rising as quickly as the land values, and other topics covered in the latest edition of the long-running publication.

Q: This is AgLetter No. 2000. Is that a significant milestone, and what does it say?

A: I think it is a significant milestone in that we've been putting these out from the Chicago Fed for a long time. They started back in 1944. And we no longer produce them at a weekly or monthly pace, but now we're at a quarterly output. It’s an indication that the Chicago Fed still is interested in agriculture and wants to help farmers and agricultural bankers in our District to have the information they need to make good decisions and for the farm sector to flourish.

Q: A leading story in AgLetter No. 2000 is, once again, the value of farmland. What happened to the price of Seventh District farmland in the first quarter of 2023?

A: Farmland values in the first quarter of 2023 moved up again, 10 percent from a year ago and 2 percent from a quarter ago, so maybe not quite as strong a performance as in the previous seven quarters, but certainly still a double-digit increase for the year-over-year value that shows there's continued strength in farmland values.

Q: This is a really strong long-term trend, it seems like. Do you have an explanation for that?

A: Well, I think the pandemic showed us how critical it is to keep the food supply chain functioning well. So it’s kind of been building over time that there's been more investor interest in farmland. That's caused some competition among groups to bid up prices. And farmers are bidding against each other for the ground that is the best. And certainly being able to expand your operation and have control over more acres is important for a lot of these larger family businesses that maybe want to have another member of the family join.

Q: So with all of the steady increases of late, is there a concern that people may be overpaying, that the values will need to start coming back down?

A: Certainly, there's some concern about farmland markets being overvalued. And we've been asking a question trying to track that. And so, in Illinois, Indiana, and Iowa, the bankers are more concerned about that, but not as much as maybe a quarter ago or a year ago. At the same time, in Michigan and Wisconsin there's less concern there. They mostly think that farmland values are properly set. It's one of those factors where you might be more worried about that if there was more debt undergirding a lot of this. But there's still a lot of cash, as reported by some of the bankers in the ag space.

Q: You also track farmland rental prices, which have not seen the same kind of increases.

A: That’s a bit of a mystery in terms of what the academic literature says versus what the markets themselves are conveying. It's possibly related to just the information asymmetry that occurs between a farmer, who actually has direct access to what the tractor is telling them on the ground, versus the landowner that's having their access to the information filtered through the farm channel. So there might be an issue there. But then also just the attractiveness of owning land seems to be something that's pulling in investors and others. That might be helping to give a boost to the ownership side versus the rental side.

Q: Interesting. There’s also a new development in land leasing?

A: There are new kinds of cash rent leases. One type is a flexible cash rent lease, with a base that's lower than is typical. But then there's some sort of a kicker that would in a good year—with high corn prices, for instance, and a really good yield—boost the payment to the landowner possibly much higher than the traditional rental arrangement would. In a bad year the farmer wouldn't have to give as much extra over that base payment. It helps to balance out the risks somewhat.

Q: And this is becoming more common?

A: It is. I think next year we'll ask a question about this more specifically. It's starting to be more standard.

Q: And farm income has stayed strong, correct? The AgLetter quotes a banker saying Illinois farmers, for instance, have “plenty of cash on hand.”

A: Yes, last year was one of the best years ever for District farm incomes, given high corn and soybean prices and a pretty sizable crop. It was a really big year. This year probably won't be quite as big, partly because corn and soybean prices are down some—and they might drift even lower—but it's hard to tell at this point so early in the season. Then on the livestock side, cattle are still priced quite high. And eggs are also high, relatively, even though they're down from their peak.

Q: What has this extra cash meant for farmers? Specifically, you track the ability to repay loans.

A: Right, so they've been very responsive in repaying their loans compared to traditional levels. You have less need for operating loans and other kinds of loans. Farmers can fund a little more out of their current cash instead of having to borrow as much. And, of course, with interest rates having risen in the past year, that's helpful for their bottom line. At the same time, there's been a lot of purchases of farm equipment. And so that might be slowing a little bit right now, but still, farmers have been able to get their operations into better shape.

Q: Speaking of interest, how have those rising rates affected agriculture in the District?

A: There hasn't been a huge impact at this point in terms of higher interest rates. One part of it, I think, is if you look at the real interest rates, they haven't increased nearly as much given that we've had higher inflation. And so, they're now near the level of where they stood at the start of 2021. So while farmers may be paying more in interest, they have also been selling their products for more. Whereas when you think about just the nominal interest rates, you have to go back to 2007, really, to get to that level of interest rates. And there's been a helpful move down in some of the other costs of production that have maybe muted the impact of interest rates. Diesel prices have decreased, plus some fertilizer products are less expensive this spring.

Q: So as we head into planting season, what is the overall assessment of agricultural conditions in the Seventh District?

A: The conditions for agriculture in the Seventh District this spring and heading into the summer are looking to be quite good overall—not as rosy as last year, but still pretty strong in terms of high farmland value increases. The ability of farmers to function with less need for their lines of credit, given the increase in interest rates, has continued to keep them going strong. It’s looking to be another positive year for farm income.

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