What Impacts Farmland Prices?

Farmland is a unique asset that continues to intrigue investors, landowners, and those in the agricultural industry. While farmland values tend to appreciate over time, several key factors influence these prices in both the short and long term. In this blog post, we’ll explore the primary drivers behind farmland prices, with insights from industry experts and reference materials.

1. Commodity Prices

Commodity prices are one of the most influential factors affecting farmland values. When prices for crops such as corn, soybeans, and wheat rise, the profitability of farmland increases, thus driving up demand and land values. The relationship between farmland prices and crop prices is particularly evident in the Midwest, where corn and soybeans dominate.

For example, according to a report by Iowa State University, each 10% increase in commodity prices leads to an approximate 2% increase in farmland values in Iowa. However, commodity markets are volatile and influenced by international trade policies, supply chain disruptions, and weather conditions, making this a critical but unpredictable factor.

2. Interest Rates

Interest rates play a significant role in determining the affordability of farmland. When interest rates are low, borrowing costs decrease, making it easier for potential buyers to finance farmland purchases. Conversely, high-interest rates can deter buyers, thus suppressing land values.

The Federal Reserve's decisions on interest rates directly impact the agricultural economy. According to a Federal Reserve Bank of Kansas City report, lower interest rates have historically been associated with higher farmland values, while rising interest rates typically result in downward pressure on land prices. Monitoring Federal Reserve announcements is crucial for anyone looking to buy or sell farmland.

3. Land Productivity

Not all farmland is created equal. The productivity of the land, often measured by its Crop Suitability Rating (CSR2) in Iowa, is a vital factor in determining its value. Land with higher CSR2 scores is more fertile and can produce higher yields, making it more valuable to farmers and investors.

For example, a property with a CSR2 score of 85 will generally be worth more per acre than a property with a CSR2 score of 50. In fact, farmland with high CSR ratings often commands premiums due to its potential for greater income generation through crop production. You can learn more about CSR ratings through Iowa State University’s resources on land values.

4. Location

The geographic location of farmland significantly influences its price. Farmland located near urban areas or transportation hubs tends to have higher values due to the potential for future development or easier access to markets.

For instance, farmland near Des Moines, Iowa, or other growing metropolitan areas is often priced higher due to its potential for residential, commercial, or industrial development. This is one of the factors that continues to push farmland prices upward in regions experiencing urban sprawl.

5. Government Policies and Subsidies

Government policies, such as subsidies, conservation programs, and tax incentives, also influence farmland prices. Programs like the Conservation Reserve Program (CRP), which pays farmers to remove environmentally sensitive land from production, can reduce the supply of farmland available for agricultural use, thus driving up prices for the remaining land.

Additionally, the availability of tax benefits, such as the 1031 tax exchange, allows sellers to defer capital gains taxes when selling farmland and reinvesting in another property, increasing the attractiveness of land investments.

6. Climate and Weather Patterns

Climate change and unpredictable weather patterns are having an increasingly significant impact on farmland values. Droughts, floods, and other extreme weather events can damage crops and reduce land productivity, leading to lower farmland prices. Conversely, regions that maintain stable and favorable weather conditions for agriculture may experience rising land values.

According to a report from the University of Illinois, climate change is expected to alter the productivity of farmland across the U.S., with some areas becoming more suitable for certain crops and others less so. Buyers and investors are becoming more cautious about climate risks when considering farmland purchases.

Conclusion

Farmland prices are influenced by a complex interplay of factors, including commodity prices, interest rates, land productivity, location, government policies, and climate. For investors and farmers alike, staying informed about these drivers is essential to make sound 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.