Main Content

What Could Dampen Farm Land Values? | May 7, 2019

Farm Journal’s Ag Pro
Sara Schafer
April 24, 2019

In the past few years, farmland values have been surprisingly resilient. Looking forward, however, prices may lean lower.

A laundry list of factors can support or sink farmland values. In the past few years, values have been surprisingly resilient. Looking forward, however, prices may lean lower, according to a recent report from the Federal Reserve Bank of Kansas City.

In 2018, the spread between returns to farmland owners and benchmark interest rates narrowed to its lowest level in more than a decade in the Tenth Federal Reserve District. At the same time, farmland sales increased in some states for the first time in several years.

“Together, the reduced spread and indications of increased sales in some regions suggest the potential for lower farmland values moving forward,” write Cortney Cowley, economist and Nathan Kauffman, vice president and Omaha branch executive, for the Federal Reserve Bank of Kansas City.

How did farmland values arrive at this crossroad?

Over the last four years, low commodity prices have pressured farm real estate markets. From 2013 to 2018, U.S. farm income declined more than 50%, and working capital declined 65%. Despite these developments, the Federal Reserve Bank of Kansas City’s Survey of Agricultural Credit Conditions shows farmland values were stable or modestly lower. From 2013 to 2018, cropland values in the Tenth District declined only 16%.

Strong farmland values have helped farmers survive the tightening of farm financials. A majority of Tenth District ag lenders reported using increased debt restructuring or increased use of real estate collateral during the current economic downturn. In the last three years, 20% to 30% of agricultural loans have involved restructured debt.

Even with stable farmland values, risks of declining values are increasing. For instance, the chart below shows that capitalization rates, which can be calculated as the ratio of cash rents to farmland values, have decreased continuously over the past decade. The cap rate has fallen from 5.4% in 2009 to 3.3% by the end of 2018. Cap rates show the annual rate of return a buyer or investor expects to receive on farm real estate, according to the economists. Therefore, lower cap rates imply, from an investment perspective, land owners are receiving lower returns on capital invested in farmland.

The decline in capitalization rates coincided with a rise in interest rates. The gaps between the blue line and the green and orange lines in Chart 2 show that in 2018, the spread between cap rates on farmland and risk-free returns narrowed to its lowest level in 10 years.

Another factor tugging farmland values lower is a recent increase in farmland sales in some states. A majority of ag banks in Kansas and Nebraska reported an increase in the volume of farmland sales in 2018 relative to the previous year. Although the volume of farmland sales declined in other parts of the District, the overall pace of the decline slowed considerably.

Combined, the uptick in farmland sales in some states, higher interest rates, persistently low commodity prices and the lower spread between returns to farmland and benchmark interest rates suggest farmland values could decline further, Cowley and Kauffman note.

Success Stories

"On December 3, 2021 Hughes Real Estate and Auction Service sold our farm in Torning Township for $10,100 per acre (plus Buyer’s Premium), a near record for Swift County. During the entire process of listing the farm Jesse explained the options and processes in clear and understandable terms. The farm was advertised extensively over a wide area via different media. He had an extensive knowledge of the property, especially productivity and drainage – that was helpful. If you are thinking of selling your property, I recommend Hughes Real Estate and Auction Service without reservation."Jerry Pahl
"We cannot say enough good things about Jesse. He helped us sell our farm land through an online auction process, and went above and beyond answering questions. He explained things in a way we could understand and kept us informed at every step in the process. Without hesitation we would recommend him to anyone!"The Steinke Family
"Hi Sherry, we are very happy to inform you that we both have really enjoyed working with you and your company in the past two years. We are hoping to work with you again in the near future. Thank you so much for all your help and really appreciate everything that you have done from starting to end of this transaction. Please be safe in these tougher times. May God bless you! BTW, Please feel free to reach us if you come across any opportunities/properties."E. Arige
"Hughes Real Estate went above and beyond in helping us get our aunt's property prepped and ready for sale. This included a house in town and farm land. They provided invaluable local expertise and were very professional and friendly. My family would recommend Hughes Real Estate with no reservations."Family of Millie H.
"Our family sold a fairly large parcel of farmland in Stevens County, Minnesota. It was a complicated property with different land characteristics and an existing CRP contract. We were very pleased with Jesse's representation. He had a lot of expertise and guided us through the different dynamics and options for selling the property. We highly recommend him. "Jim J. and Karen H.
"Thank you for all you have done helping us sell our home, Sonia. It was a pleasure working with you! Best of luck in your future, you are an excellent realtor!"Mervin and Carole S.
"Sonia, Thank you so much for all you have done for us while we searched for the perfect home, with you we found it! We will refer you to everyone we know that is looking for a new home!"Jon and Missy R.
"Sonia, Thank you so much for the amazing job you did helping us find a home. You were very patient and listened to what we were looking for !"Mark and Karla H
"I was very satisfied with Sherry’s performance as my Realtor, everything was great on her behalf. Thanks again, Sherry! "Bob M.
"Jesse was our real estate agent when we decided to sell our home. He came to our first appointment well prepared with area statistics on houses for sale, houses similar to ours and helped us easily come up with a selling price. Jesse was able to answer all our questions with accurate information. He listed our house on a Thursday morning and had the first showing two days later. This showing resulted in the sale of our home. Jesse made the whole purchase and closing process very easy for us by directing us through each step in a very timely manner. Jesse is part of a national real estate system (Multiple Listing Service or MLS) that allows his sales to go out on the internet and other real estate agents can set up showing of the property. It is like paying one real estate agent but getting the benefit of many others. Shawn and I highly recommend Jesse."Shawn and Holly Rodahl Benson, MN