Farmland prices have increased by large amounts over last year’s prices. Even given these increases, farmland prices still are near levels suggested by the historical relationship between farmland prices, farmland returns, and interest rates.
Significant declines in farmland prices could occur if 1) commodity prices fall from current expectations or 2) interest rates increase because of Federal Reserve Bank (FED) actions to fight inflation.
The National Agricultural Statistics Service released land values and cash rents for states in the U.S. For 2022, average Illinois cropland prices are estimated at $8,950 per acre, a record level 13% higher than the 2021 level of $7,900 per acre.
The last time Illinois land values increased by more than 13% was in consecutive years in 2011 (16% increase), 2012 (15%), and 2013 (14%). Since 1970, land values have increased more than the 2022 increase in 19% of the years, suggesting that the increase in 2022 is high but also is not a unique event.
Other studies confirm rising land prices in the Midwest. The Chicago Fed’s AgLetter indicates land values in the northern 2/3 counties of Illinois increased by 18% between the second quarter of 2021 and the second quarter in 2022. A Purdue Agricultural Economics Report indicates Indiana land values increased by over 30% from June 2021 to June 2022.
A Farmland Value Benchmark Study prepared by appraisers at Farm Credit Illinois evaluated 20 benchmark farms over the southern 60-counties of Illinois. From July 2021 to July 2022, land values averaged a 28% increase on Farm Credit Illinois’s benchmark farms.
Overall, much of the land price increase appears to have occurred before April 1. The Chicago Fed, for example, indicated that land values in Illinois did not change between April 1 and July 1, 2022. Likewise, most of Indiana’s increase occurred in the last half of 2021 rather than the first six months of 2022.
Most economists believe the price of farmland should equal the discounted sum of all future returns to farmland. Obviously, returns and discount rates in the future are not known with certainty. Expected future returns are proxied by cash rents, with the presumption that current
rent levels provide some indication of future rent levels.
Current interest rates are often used to measure discount factors, also under the assumption
they represent market expectations for the future. Cash rent levels and interest rates are
discussed in the following two sections. The combined effects of the two factors are then
evaluated in the “Capitalized Values and Farmland Values” section.
An increase in interest rates generally lowers asset prices, particularly long-lived,
non-depreciable assets such as farmland. In addition, higher interest rates increase farm
mortgage costs, thereby increasing the costs of acquiring farmland. And higher interest rates
correlate with higher returns on alternative investments, making farmland less attractive as an
investment.
Current farmland price levels do not appear out of line with historical relationships between
farmland prices, farmland returns, and interest rates. While concerns of overpriced farmland
exist, farmland prices are not likely to have large declines unless either returns fall, or interest
rates increase.
Farmland returns could fall, and corn and soybean prices are the most likely cause of those
declines. Lower prices could happen, with official USDA and Congressional Budget Office
(CBO) forecasts suggesting much lower prices coming in future years.
Still, prices on Chicago Mercantile Exchange contracts do not suggest much lower commodity
prices in 2023. Continuing increases in non-land costs also could cause farmland returns to
decline.
A more likely immediate source of drag on farmland price is higher interest rates. The FED has
announced it will attempt to lower inflation by continuing to raise interest rates later this year.
Any increase in 10-year CMT rates will place capitalized values below farmland prices.
Farmland prices have risen a great deal in the past year. Still, higher farmland prices appear to
be in line with current farmland returns and interest rate levels. Farmland prices could decline in
the next year, likely caused by either lower commodity prices or higher interest rates. Higher
interest rates seem more possible at this point, but higher interest rates are not a foregone
conclusion.
Illinois farmland prices continue to rise
