Farmland prices strengthen as key indicators raise demand
Dickhut provides tips for navigating market
After a period of extreme market swings in all sectors of agriculture mainly caused by the coronavirus pandemic, much of last year’s trends showed a sign of strength in the industry. Farmland was no exception.
“The price trend on farmland, especially on good cropland, in 2021 strengthened as the year went along,” Randy Dickhut said. “Underlying factors supporting land values were hitting on all cylinders.”
Dickhut is the senior vice president of real estate operations for Farmers National Company, which offers real estate sales and auctions across much of the United States.
In 2021, the Federal Reserve and various universities reported cropland values rising 15%-30%.
Of the Upper Midwest states, Iowa had the greatest average sale price of high-quality land at $14,500 per acre, a 29% increase from 2020, according to a survey conducted by Farmers National Company. In Dairy Star’s coverage area, South Dakota’s top quality cropland followed at $10,500 per acre (23% increase); Minnesota at $9,700 per acre (26% increase); and Wisconsin at $7,700 per acre (10% increase).
In terms of rental prices, the United States Department of Agriculture reported the average rental price for cropland in Minnesota was estimated at $177 per acre in 2021; $133 per acre in Wisconsin.
These prices are all reflective of market influences that strengthened as the year progressed.
“In the last part of the year, farm income became better and that was on top of 2020 where there was an extra influx of cash from government support,” Dickhut said. “A better financial condition prompted many farmers to be more active and that drove prices.”
Low interest rates were also supportive of land prices and drove a competitive group of individuals to look at farmland as an investment. Most of the buyers continued to be active farmers who had extra cash in their pockets. Some sellers, mainly non-operating landowners were looking to sell before potential tax law changes.
Dickhut noticed an influx of individual investors wanting to become active in the farmland market. This trend began with the pandemic when some individuals wanted to move out of the cities or others wanted to own a part of the food production system with land.
“The demand was there,” Dickhut said. “Non-farmers wanted to buy farmland so they could hedge against the loss of value on another asset or to have a safe, long-term investment.”
The demand from farmers and investors outpaced the land available for sale and ultimately drove prices and created a positive outlook for land prices in 2021. While the demand is strong, there seems to be a more normal amount of land on the market indicative of a calmer market climate, Dickhut said.
“Land prices, due to the many unknowns in the world today, should be steady to stronger for the next six months,” he said. “It’s similar to the residential market in the sense that buyers have to be aggressive. They are having to step up to get anything bought.”
The last time the markets peaked was between 2012 and 2014, Dickhut said.
“Land values then softened because grain prices were down, farm incomes were average to below average after a few years of good income,” he said. “Farmers became more cautious to buying, prices plateaued and the land market was stable.”
For sellers in this competitive reality, Dickhut said the most effective way to get the best price in an open market is through a traditional auction, online-only auction or simulcast where bids are taken in person and online simultaneously.
In any given year, only 2% of the agricultural land in the U.S. changes ownership while less than 1% of that is traded in the open market, Dickhut said.
“Only a very small percentage of land is sold each year,” Dickhut said. “If landowners are thinking about selling, don’t sell it quietly.”
For buyers, competition remains stiff, especially for those less established in the industry.
“Lenders are more conservative since the high inflations in the 1980s,” Dickhut said. “They’ve been more cautious and require more money down. Luckily, there are some programs to assist beginning farmers to buy land, possibly a contract for deed to purchase, or control land through renting.”
The year ahead faces many unknowns, especially with uncertainty rising in the markets overseas.
In the United States, commodity prices have reached unseen values yet input costs are also higher than what has been seen in recent history. Interest rates continue to rise but probably at a slow pace.
“Livestock and milk prices are strong, and farm incomes looks like it’ll be good,” Dickhut said. “But, there are worries of crop yields and droughts and other weather incidences.”
Farmland remains a necessity for dairy farmers, and now there is more competition than ever before from outside the agriculture industry.
“It’s all still playing out for this year ahead,” Dickhut said.