Farmland values to plateau in Q4
Farmland values have hit record-breaking prices this summer. For example, some land in Iowa hit roughly $26,000 per acre. Very few independent land buyers are willing to pay that price, and even fewer have the actual means to do so. It’s creating a barrier to entry for new, young farmers and making land loans much more critical in the marketplace.
But as we begin the transition into autumn, however, the farmland market is explicitly headed toward a plateau. One of the main reasons for this development is the unsustainable nature of these prices. The other factor in stabilizing prices is the recent increase in interest rates. As a result, we are keeping an eye on the debt-to-income ratio in the current ag market as a possible risk area, primarily through the end of Q3, where we hope for some stability.
According to a survey conducted by the Federal Reserve Bank of Chicago, roughly three-fourths of respondents in Illinois, Indiana and Iowa believed their farmland to be overvalued. That same survey reports that 25% of respondents anticipated farmland values to continue rising, while 71% thought the values had stabilized.
This reflects what we’ve been seeing in farmland as a whole. Stressors such as ongoing supply chain shortages from COVID-19 and the inflation of gas and oil prices due to the war in Ukraine are causing sharp land value increases. While some institutes like Farmdoc Daily report sound economics when examining ag income vs. land values, we expect prices to level and proactively monitor any hints of market correction in land.
Aside from farmland, pastureland has taken a significant hit recently due mainly to the severe droughts that have swept through the southern and western states. In a recent report, the USDA stated that roughly 60% of all cattle in the U.S. are experiencing some form of drought. As a result, ranchers are being forced to slaughter them at unprecedented rates. July saw the highest-paced beef slaughter since the USDA reported these numbers in 1986.
All these factors have contributed to the rise in prices of beef, steak and chicken at the grocery store. Unfortunately, this issue is unlikely to disappear, as this year’s increased slaughter will leave fewer cows to birth calves for next year and likely impact available beef/steak in 2023.
OUTLOOK FOR 2023
Looking ahead to 2023, we’re hoping to see some drought relief for the states that need it, which should help the market level out, at least in farmland and pastureland. The current market is skewed due to various pressures like climate change, the war in Ukraine, and the lasting effects of COVID-19. If some of these pressures are remedied in 2023, we should look at a strong and stable land market. No one is making more land, and people and animals will always need to eat.
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