Farmland values hold steady as financial pressure builds

Growing interest rate concerns threaten to exacerbate financial stress building within the US farm economy, despite land prices remaining steady, according to Farmer Mac’s director of economic research.

The United States Department of Agriculture projects its debt-to-asset ratio, a key measure of solvency and leverage in the sector, will register at about 13 percent this year, Jackson Takach told Agri Investor following the publication of Farmer Mac’s quarterly agricultural overview The Feed.

Takach compared the debt-to-asset ratio with its height of 22 percent in the mid-1980s and circa 16 percent in the late 1970s.

“Folks did not lever up at the same pace that they did in 1970s, so the agricultural boom period in the 2010s was really fueled by on-farm retained earnings. People were using that cash and re-investing that cash,” said Takach. “Operating debt – that annual, working debt – has held steady in the last few years and what people are doing now is they are taking more debt on the land.”

Takach said rising interest rates are likely to add another layer of complexity to the financial conditions of the farm economy, with inflation set to play a key role.

“If rising interest rates are paired with inflation, that supports land, or any real-estate asset or hard asset like that,” said Takach. “If we don’t see inflation come in, then that starts to put downward pressure on [farmland] prices because the returns are better on other assets.”

Regionally, Takach said overall farmland values had seen reasonable gains and that outliers – such as a 10 percent year-on-year growth in Missouri farmland values or a 2.7 percent annual contraction in Kansas properties – often reflected the logistics of accessing export markets and conditions within those markets, as much as farmers’ underlying financial position.

“The further away you get from the Mississippi River, the lower the gains are, the more losses there are in average farm real estate value,” Takach said. “Wheat did not have a very good year and Kansas is sort of the center of wheat production, so there are some elements of the commodity environment and profitability in those numbers.”