Tariffs, Rising Interest Rates Threaten U.S. Farmland Prices

U.S. farmland prices may drop due to headwinds including rising interest rates and new tariffs.

The prices for farm land have been steady after peaking at all-time highs in recent years when farmers benefitted from high crop prices and low interest rates. Even after crop prices have dropped in past years, land prices have held firm nationally because the capitalization rate (the ratio of net operating income to asset value) has remained attractive for buyers.

But those conditions are deteriorating among recent economic changes including tariffs, some experts say, and it will likely eventually impact farmland prices for at least a short-term by increasing inventory. How much prices could drop is unknown, but considering the average value of farm real estate increased by 47 percent from 2009 to 2017, a decline at some point is not unexpected.

"You had a perfect storm for land values – high commodity prices and low interest rates," said Steve Bruere, president of Peoples Company, based in Clive, Iowa . "Lots of institutional capital has moved into the market since 2008 but the farmer is still the driver of the market. Farmers still buy 80 percent of everything that sells. That has kept the market strong."

Commodity prices that dipped in recent years haven't taken farmers out of the buying equation, Bruere said, because they have continued to benefit from a favorable cap rate. The result is that in a fertile farm state like Iowa, where Bruere and team are deeply entrenched, inventory has remained lean and prices therefore strong, still commanding an average of more than $7,300 per acre compared to the $8,700 price peak in 2013. Today's Iowa farmland prices are almost double what prices were in 2007, at an average of $3,900 per acre.

" What has been surprising is how resilient the land market has been since 2013," Bruere said. "We slipped off the peak, but it has remained strong. What's driving that is a lack of inventory of farms for sale."

But what goes up can eventually go down. That's why, by the beginning of this year, Jim Farrell, president of Farmer's National Company in Omaha, Nebraska, was concerned that rising interest rates could ultimately take a bite out of high farmland prices.

"The slow farm economy could push more land on the market as some farmers look to sell a parcel or two to shore up their balance sheet," he told Agweb. "Any increase in land on the market will likely pressure values at this point."

In Arkansas, farm land prices have held steady but the growth rate has slowed. Still, a University of Arkansas study forecast price increases of 4.3 percent in 2017. That was before changes in 2018, like higher interest rates and the government's announcement of new agricultural tariffs. That is against the backdrop that farm land in Arkansas has increased in value most every year in the past 60, except for 1982 to 1987 when values dropped 34 percent amid higher interest rates and low commodity prices.

At the moment, there's still only about one farm per sale on average per county in Iowa when buyers are looking for quality land providing 85 percent tillable acreage. That's lean inventory, Bruere said. But that's also a factor that could soon shift.

Farmers haven't been making as much money in recent years. Combined with fears of further tarrifs, and what Bruere calls a resulting morale factor, and rising interest rates, that could make land purchases less appealing, reducing demand and thus prices.

It's a scenario that may already be in motion, since net income for farms nationally is projected to remain roughly the same in 2018, down from roughly half the level reached in 2013, according to a report from the University of Missouri. Conversely, the federal funds rate has increased by 1.25 percent since December 2017, and new tariffs imposed by the U.S. government will impact some agricultural products including soybeans, wheat, corn, cotton and pork.

Now, it's just a matter of what the total impact is the to the cap rate, determining if land purchases at current prices makes sense; a simple equation. And, while the government has said it will subsidize farms impacted by the tariffs, that program remains nascent.

"It's our sense that (farm land) inventory levels will increase…and the cap rate could move the other way making new purchases less appealing," said Bruere, whose company works across 20 states, from the Pacific Northwest through the Midwest and down in the Delta region of the South and Florida. "So, our outlook isn't terribly optimistic at the moment.

"If farmers aren't buying but 50 to 60 percent of the transactions instead of 80 percent, and the market relies on the institutional investor for capital, then that's where you could see a significant move in land values," Bruere said.

But make no mistake, he said. Investment in farm land remains a strong long-term investment and having more inventory will provide more value opportunities.

"We are still seeing some high-quality ground bring crazy prices, farmers making long-term legacy buys and expanding operations," Bruere said. "Long-term, farm land is one of the greatest investments in the world. There is growing demand for food and only so much good land. So, I'm bullish long term.

"But in the short term, we may see some disruptions."

The long-term bullish sentiment is shared by Randy Dickhut, senior vice president of real estate operations for Farmers National Company, who notes that good, quality farmland in the Midwest is still commanding strong prices.

"It's predominantly farmers and maybe some local investors (buying land), but it's basically farmers," Dickhut told Agrinews. "They are willing to bid up to get that farm near them or the good ground that doesn't come up for sale very often. There's enough cash overall in ag to be able to do that at this time."

That could change, however.

"Farm incomes could be stressed again, and there could be multiple years of decreased cash flow for farm operators," Dickhut said. "And interest rates are starting to rise slowly."