Five Factors that Influence Farmland Values

June 27, 2024

Article from Summer 2024 Hertz Outlook Newsletter

In each issue of our Hertz Outlook newsletter, we give you a full view of “the what” behind all that is occurring in the farmland market. In this article, we would also like to explain “the why” behind land prices. In the nearly 80 years that Hertz Farm Management has been in business, we have found the following five factors to have the greatest impact on farmland values:

1. Commodity prices are the single biggest factor with influence on the land market. This is because farmers are the number one buyers of farmland, purchasing 7 out of 10 farms that are sold. And when they are making money, farmers plow their profits back into their business. So, when their cashflow is positive and the grain price outlook is strong, the demand for land goes up. Weak commodity prices lead to soft (or no) farm profits and a shaky land market. It can often take the land market several months to adjust to lower grain prices, although in areas with weak production, it can happen more quickly.

2. Interest rates are a major undercurrent to our entire economy. When interest rates are low, it’s more affordable to do just about anything, including buying a farm. Alternatively, when interest rates increase, borrowed money is more expensive and therefore impacts the market towards less consumption. Yet another aspect is how interest rates influence alternative investment decisions. For several years in farmland, ultra-low interest rates attracted investor dollars in search of better returns. During that time, a 2 to 3% annual cash return on land was comparatively attractive. However, when interest rates rose, as they have over the past 18 months, excess investor capital started to flow towards higher immediate returns in some alternative investments.

3. Crop input prices are the third major contributing factor to farmland values. You can think of crop input prices as the ingredients to the recipe for growing a crop. Whenever we have either more ingredients and/ or more expensive ingredients going into the recipe, the resulting outcome (profit) will be impacted. Agriculture profits soared in 2021 and 2022, because commodity prices moved higher relative to input costs. In 2023, however, the pendulum swung back, and input suppliers captured a larger portion of the available margin with record or near-record costs for seed, fertilizer, fuel, and equipment. For 2024, input prices moderated a bit, especially for fertilizer. But commodity prices have dropped even more than input costs, thereby setting up for the smallest profit margin forecast in several years – and the real possibility of no profit margin for some producers this year – which will pressure land values.

4. Land sale volume also impacts land values. As we learned in basic economics, when the supply of something is scarce, relative to demand, the price normally rises. And vice versa, more supply than demand leads to lower prices. In recent years, we saw a large number of farms offered to the market, but because of incredible profitability and future profit potential, the demand to purchase additional land outpaced the supply of farms available, and therefore we saw land prices move strongly higher across the Corn Belt.

So, now that we are looking at near or below breakeven profits for 2024, will demand for additional land soften? It’s reasonable to think that it could. However, that does not necessarily mean that land prices will fall. The supply-demand of farmland is location specific. Local neighborhood dynamics play a huge role in that supply-demand relationship. We all know areas where land prices never seem to soften, and other areas where sales look like relative bargains – this is often the result of local supply-demand relationships playing out.

5. Finally, local historical wealth also influences farmland values. Of the five factors mentioned here, this one may be the most ambiguous, because it can be difficult to come up with a precise measure of local wealth. We all know those neighborhoods where land values seem to include a premium that is not common to the broader market. Many of these financially vibrant neighborhoods have a correlation to very productive soil types, and often, a diversity of enterprises.

For example, in the highly competitive and record setting land sales in the northwest corner of Iowa, you can find 3 of the top 4 Iowa County Average CSR2 ratings—O’Brien (#1), Osceola (#3), and Sioux (#4). (Grundy county in central Iowa is #2.) Over the longterm, the most productive soils will outperform other areas, and this long-term benefit accrual creates a fertile environment for wealth creation. In addition to consistently strong soils, there is also a significant livestock presence in Northwest Iowa that provides earning and income-stream diversity. Add in productive livestock operations, with access to manure, and you have another enhancement to top-quality soils.

From area-to-area, at Hertz Farm Management, we have observed a strong correlation between quality of soils, local historical wealth, and the competitiveness/ strength in local land markets.