Surging US farmland markets eye interest rate impact

Recent strength in farmland markets has been driven in part by rising interest rates that are themselves likely to be a key factor shaping buying strategies in the years ahead.

Professionally managed US farmland has produced a combined total return of more than 10 percent over the year ending in the third quarter, according to the National Council of Real Estate Investment.

NCREIF’s third quarter index report showed that permanent and row crop farmland markets recorded a combined return of 10.21 percent over the previous four quarters, comprised of 6.31 percent appreciation and income of 3.73 percent.

Row crop total earnings over the past year of 14.43 percent were driven primarily by 10.6 percent appreciation and outpaced permanent crop earnings of 4.05 percent, of which NCREIF reported 4 percent was income. Among regions, the Corn Belt was the leader with 26.3 percent growth over the past year that beat out 18.4 percent growth in the neighboring Northern Plains and 16 percent growth among properties in the Lake States.

On NCREIF’s call, University of Illinois professor and director of the TIAA Center for Farmland Research Bruce Sherrick provided an overview of what he called the “massive re-alignment in monetary systems” that has been the primary driver of inflation supporting farmland prices.

He compared the US Federal Reserve’s recent rate increases to other challenging economic periods of the past 30 years, and explained how the variety of direct and indirect payments to farmers and consumers following covid-19 makes comparisons with those periods less than instructive.

“Farmland has provided a really strong hedge against inflation, even if to some degree this time, perhaps the appearance of causation is greater than it is, because it happened by artificially building up the balance sheet, not just in ag, but around the world,” he said. “Lots of other programs that happened made the balance sheets really strong for farmers; but to be blunt, they made everybody’s balance sheets stronger.”

On a separate mid-November call hosted by Peoples Company, Sherrick discussed the regional impact of the USDA’s market facilitation payments on farmland values, which were highly correlated. Peoples Company president Steve Bruere said on the call that monetary policy changes are among the factors that have recently increased focus on appreciation, as opposed to income, among farmland buyers.

“That historical 20-year appreciation rate has been 5 [percent]. As you are sitting here today with cap rates in that 2.5 to 3 [percent range] and CPI at 8 [percent] for this example, you really need to be picking up 8 percent on the appreciation here to hold it together. That’s what folks are betting on when they come into farmland right now,” he said.

“They don’t want just the cash yield at 4percent when inflation is at 8 [percent] because they are going backwards 4 percent. If they can get into farmland and get some cash yield with some opportunity for some appreciation that’s where they want to be right now. Time will tell if that’s a good bet, but that’s what we are seeing a lot of outside capital do.”

Bruere – who is based in Iowa and whose company is active in farmland markets across the country – noted the increased role of outside capital relative to local producers in recent years. He estimated that farmers currently account for about 60 percent of farmland sales at auction, with the remainder coming from a variety of investor types. Bruere compared the current farmland market to a period immediately following a price correction in 2013, when high sale prices at auction clouded the fact there were relatively few active bidders.

“The fact that interest rates have moved up so hard and so fast has really eliminated the ability of leveraged buyers to participate in the market. You are completely reliant on cash buyers, so outside capital or farmers that are in a great financial position that they can pay in cash,” he explained.

“At what point does that cash dry up or are there other investment alternatives that look more attractive and does that dynamic change? I’m optimistic the market is going to keep performing pretty well, but I’m also anxious about it, just living in the real world of transactions on a daily basis.”