Various factors affect demand for land
Crop yields, interest rates, tariff situation and negotiation of new farm bill lead the list.
The land market that otherwise faces some headwinds, including higher interest rates, relatively weak commodity prices and significant trade uncertainties. Localized differences in yield results are playing a slightly larger role in farmland sale results this fall and early winter. Early-season sales already reflect this uneven trend. In areas where another big crop was produced, there is more strength and overall stability in the land market, even in the face of lower grain prices. Essentially, these big production areas are “out-busheling” the weakness in crop prices, per se. However, in local areas where crop yields were average or below, there is more noticeable softness in the land market. Regardless of the area, high-quality farms with the most productive soils, solid drainage, easy farm ability and strong fertility continue to sell best. And despite some negative factors in the land market, farmers continue to pursue acquisition opportunities when they make sense to the core operation of their business.
Understanding Today’s Land Market
Pay special attention to current issues affecting land prices.
First, learn whether the area you are interested in had strong or weak crop production in 2018. Production success or disappointment from area to area has set the mood in the countryside in the current sales season.
Second, keep an eye on increasing interest rates, as higher rates will continue to pressure farmland values. The Federal Reserve is expected to again raise short-term rates at their December meeting, which follows a consistent pattern of bumping up short-term rates since late 2016. While short-term rates don’t directly impact long-term borrowing costs, short-term rates quite directly impact farm operating notes, which are now squarely in focus as we are in operating loan renewal season. And since early fall, long-term rates have appreciably increased for the first time in many years.
Third, disruption in the commodity markets by the enactment of global trade tariffs is real and has softened U.S. grain markets. How global trade negotiations play out in the weeks and months ahead will continue to impact commodity prices, market confidence and, ultimately, underlying asset values, including farmland.
Crop insurance, new farm bill
As we approach the 2019 growing season there will be a reset in crop insurance price levels for 2019. If things don’t change in the grain markets, these revenue policy price levels will reset to significantly lower levels for 2019 production and will add more pressure to an already stressed market. Finally, negotiations continue the new farm bill in the current lame-duck Congress. Any new farm bill policies will likely impact the countryside for the next several years.