Farmland is a unique asset that continues to attract investors, landowners, and people in the agricultural industry. Farmland values generally appreciate over time, but many different factors influence prices in both the short and long term. In this post, we’ll look at the main drivers behind farmland prices, with insights from industry experts and trusted reference materials.
1. Commodity Prices
Commodity prices are one of the biggest factors affecting farmland values. When prices for crops such as corn, soybeans, and wheat rise, farmland becomes more profitable. Higher profitability increases demand and pushes land values upward. This relationship is especially clear in the Midwest, where corn and soybeans dominate the landscape.
A report from Iowa State University found that a 10% increase in commodity prices leads to about a 2% rise in farmland values in Iowa. However, commodity markets change quickly. Trade policies, supply chain issues, and weather events all influence these prices, making commodity markets an important—but unpredictable—factor.
2. Interest Rates
Interest rates also play a major role in farmland affordability. When rates are low, borrowing costs drop. This makes it easier for buyers to finance farmland, which increases demand. When interest rates rise, buyers may hesitate, and land values can soften.
Reports from the Federal Reserve Bank of Kansas City show a clear trend: lower interest rates are linked to higher farmland values, while higher rates create downward pressure. Because of this, anyone looking to buy or sell farmland should pay close attention to Federal Reserve announcements.
3. Land Productivity
Farmland productivity varies widely from one property to another. In Iowa, productivity is often measured using the CSR2 (Crop Suitability Rating 2) system. Higher CSR2 scores indicate more fertile land with better yield potential. These properties typically bring higher prices because they generate more income for farmers and investors.
For example, a farm with a CSR2 score of 85 is usually worth more per acre than a farm with a score of 50. Land with premium CSR ratings often commands strong prices due to its long-term production value. Iowa State University offers helpful resources for understanding CSR ratings and how they impact farmland values.
4. Location
Location has a significant influence on farmland prices. Land near urban areas or major transportation routes is often more valuable. These locations offer easier access to markets and may also have future development potential.
For instance, farmland near Des Moines or other growing metro areas typically sells at higher values. Urban expansion continues to push farmland prices upward in areas with growing populations, job markets, and infrastructure.
5. Government Policies and Subsidies
Government programs also affect farmland values. Subsidies, conservation programs, and tax incentives can change the supply and demand dynamics of farmland. The Conservation Reserve Program (CRP), for example, pays landowners to remove environmentally sensitive farmland from production. This reduces the amount of available farmland for farming, which can increase the value of the remaining acres.
Tax advantages also matter. Programs like the 1031 tax exchange allow landowners to defer capital gains taxes when they sell farmland and reinvest in another property. These policies make farmland ownership more attractive and can support strong values.
6. Climate and Weather Patterns
Climate and weather patterns are becoming more influential in the farmland market. Droughts, floods, and extreme weather can damage crops and reduce long-term land productivity. When productivity drops, land values often follow.
Regions with stable and favorable weather conditions may see the opposite effect. These areas may experience rising land values as buyers look for predictable growing conditions. Research from the University of Illinois suggests that climate change will reshape farmland productivity across the U.S., making climate risk a growing concern for buyers and investors.
Conclusion
Farmland prices are shaped by many forces, including commodity prices, interest rates, land productivity, location, government policies, and climate patterns. Understanding these factors helps both investors and farmers make better decisions in the agricultural real estate market.
If you’re thinking about the farmland market, reach out to experts in the field, like David Whitaker and call at (515)-996-5263, and he’ll be happy to assist you with any concerns or provide expert guidance to help you navigate the complexities of the farmland market. You can also reach out via email at info@wmgauction.com to discuss anything.
