When it comes to buying farmland, there are several factors to consider.
University of Illinois ag economist and professor Bruce Sherrick says a core consideration is the land’s earning and profitability potential.
“As with every asset, land is what you can make off it,” he says.
Of course, other factors can change the value to a particular farmer, such as location.
“A farm that borders you is worth more to you,” Sherrick says.
University of Illinois ag economics professor Nick Paulson says location is one of the most important things for farmers.
“‘Location, location, location’ couldn’t be more fitting,” he says. “Obviously you can’t move farmland. It has to fit with the operation if the intent is to buy it to use in production.”
Paulson says farmers sometimes have to wait a long time before they get a chance to buy a certain farm, and they don’t sell land very often.
“It’s that 80 acres across the road they’ve had their eye on for years and years,” he says. “For farmers, we buy farmland, we don’t sell it.”
Sherrick says farmers weigh their cash on hand, what they can make off a farm and how it fits with their operation, and this drives their purchasing decisions.
“I think markets are incredibly rational,” Sherrick says.
Iowa State University economics professor Rabail Chandio works at the university’s Center for Agricultural and Rural Development. She says survey results show the majority of Iowa’s farmland is bought by people who plan to farm it themselves.
“Most of the people who are buying farmland in Iowa are existing farmers,” she says.
For both farmers and investors, land is a good way to combat inflation, as it reliably increases in value over time.
“Farmland has always been attractive as an inflation hedge,” Chandio says.
Interest rates have surged in recent years, which Sherrick says could impact non-farmer investors looking to buy land more than it affects farmers, although it is an issue for some. He says farmland investors may look elsewhere for returns.
“People who have money to invest, suddenly treasury bills, other things I can invest in suddenly generate a higher rate than farmland,” Sherrick says.
Many farmers are buying land with smaller amounts of debt or buying outright with cash, especially after years with good overall farm profits from 2020 to 2022.
“Farms have very little debt,” Sherrick says. “The sector is very low-debt.”
He says the total debt load for U.S. farmland is about 13.9%, and any farmers who have fixed-rate debt at 3% likely don’t mind it given current debt levels.
The surge in interest rates is more of an issue for younger farmers who have to use more financing in their operation and also farmers who rent more ground.
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“It squeezed people who were renting a lot,” Sherrick says.
Chandio says cash rents generally follow the direction of land values. She says Iowa survey results have shown the impact of higher interest rates on land prices.
“Interest rate hikes were the most important factor farmers mentioned impacting the farmland market,” she says.
Chandio adds the higher interest rates “have a more negative effect” on young and beginning farmers who might not have as much cash on hand or land already paid for.
Paulson says interest rates are an obstacle, although it has not had a dramatic impact yet.
“The interest rates are definitely a headwind,” he says. “I think people who follow farmland prices maybe are surprised it hasn’t softened more with the interest rates.”
The rise in land prices seems to have cooled off after the surge in recent years, as farm profit margins appear to be tightening, but he says demand for farmland is still solid and prices aren’t likely to decline.
“The demand has backed off,” Sherrick says. “It’s still at very high numbers compared to two years ago, three years ago, five years ago.”
He says farmland has over time seen a pretty constant 5 to 6% appreciation in value, with some variations during certain periods. But it remains a consistently reliable investment.
“As an asset it does better than most investments,” Sherrick says.
Chandio says there are periods when farmland prices drop, like the 1980s, but they bounce back, and the long-term trend continues to show that gradual increase.
“Farmland prices have always risen over the long horizon,” she says.
She says farmland values still appear to be increasing, but more slowly than before.
“We are seeing an increase, but it has definitely cooled off,” Chandio says.
Sherrick expects farmland to continue gaining value. He says an increase in the world population and standard of living, as well as agriculture’s potential as a “green” industry and renewable fuel producer, point to farmland remaining very valuable for the foreseeable future.
In purely business terms, farmland does well long-term.
“It does have good performance when you view it as an asset,” Paulson says.
Also, farmland does not come up for sale often relative to other assets, so farmers are often willing to pay more to capitalize on an opportunity.
“The time to buy land is when it’s for sale,” Sherrick says.
He referenced a recent land purchase that made headlines when a Saline County, Missouri, farm sold at auction in September for $34,800 an acre. It had been owned by the same family for multiple generations.
As a stable asset that gains value and produces yearly revenue along the way, Sherrick says it is easy to see why farmland remains in demand.
“What asset would you rather own?” he says.