Farmland values show strength of agricultural sector – AgriNews
WEST LAFAYETTE, Ind. – Farmland values - and sales – continue to be strong, signaling an equally strong US farm economy.
The “perfect storm” of not-so-perfect factors has pushed demand for farm and rural properties and the prices buyers were willing to pay to record highs over the past two years and real estate industry professionals say the early indications in 2022 point to strong demand and prices will continue.
“Anything that could impact farmland prices is putting positive pressure on land values right now,” Purdue Extension ag economist Todd Kuethe said at the Purdue Top Farmer 2022 conference.
In July 2021, the Purdue Center for Commercial Agriculture released the results of its annual Purdue Farmland Values and Cash Rents Survey. Kuethe said that survey showed prime farmland in the state averaged $9,785 per acre, an increase of just over 14% from 2020.
The state’s farmland posted strong increases in value, with average quality farmland averaging $8,144 per acre, a 12.5% increase over the previous year, and poor quality land at an average of $6,441 per acre, up 12.1% from the previous year. 2020. These values are overall the highest since 2014.
In addition to asking farmers about productivity and yield estimates, the survey also asks farmers to rate factors that impact values. These factors include net farm income, commodity prices, liquidity, inflationary pressures, interest rates, and agricultural growth and yields.
“If we look at all of these factors, they basically contribute to increasing land values,” Kuethe said.
Farm income plays an important role in driving farmland values and influencing buyers of farmland. Kuethe cited US Department of Agriculture farm income statistics and farm income forecasts.
In December, the USDA’s Economic Research Service released its forecast for 2021, which predicted US net farm income of $116.8 billion. This represents an increase of $22 billion from the 2020 level of $94.6 billion.
“You can see all these financial headlines about how farm income should continue to rise — and that’s a good sign. This puts a positive pressure on land values as our incomes increase,” Kuethe said.
However, one land-related income that has not seen strong growth is the cap rate. The capitalization rate is the rate of return of an investment property. The rate is based on the expected yield of the property.
While cash rental rates on farmland have increased, that growth has been relatively slow, Kuethe said.
“We have seen growth in cash rental rates over the past two years here in Indiana. But this growth has been relatively moderate. Part of that, I’m sure, has to do with uncertainties, future expenses, not wanting to charge rents that are too high. It also has to do with when commodity prices look like when rents are negotiated versus what they look like at the end of the year,” he said.
Cash rent relative to land value has been declining in Indiana in recent decades, according to Kuethe.
“We’re seeing less of what we call a cap rate or return on asset has been suppressed. We’ve seen sort of a decline in cap rates and suppression of cap rates across the country,” a- he declared.
As land values remain strong, so do land sales and demand.
RD Schrader, of Columbia City-based Schrader Real Estate and Auction, said his company had three times the sales of land over $10,000 per acre than the company had in 2019 and nearly twice the number of sales over $10,000 per acre than he had in 2020.
While some of the price increase can be attributed to the limited supply of farmland in the market, Schrader said prices and values continue to remain high even as more land comes up for sale.
“A big part of the argument that farmland values were maintained was that it was a limited supply market. But through 2021 we have seen an increased volume of land in the market and seen these increased values against that,” he said.