Land market leveling out after ‘rocket fuel’ years

NEVADA, Iowa — The market for Midwest farmland remains strong, but sales show signs that the market is reaching a plateau, after several years of upward momentum.

“We are still seeing really strong sales for the best quality farms. But for the first time in three or four years, we have also started to see a few no sales, here and there. We are in a different market than we were 12 months ago,” said Doug Hensley, president of real estate services at Hertz Farm Management.

Sales and values appear to have leveled out after consecutive years of strong farm income that propelled farmland sales.

“In 2020, 2021, 2022 and 2020 and 2021, in particular, this market was just on rocket fuel. 2023 overall was a period where things didn’t necessarily come back to Earth, but the market has transitioned into more of a plateaued situation,” Hensley said.

While the demand for top-quality farms remains strong, he said that buyers, from farmers to investors, have pulled back on the amount of risk they are willing to take.

“When things are really, really good, people are willing to take more risk than they are when things are a little tighter. Not that we are in an unprofitable time, because 2023 was a profitable year, it just wasn’t as profitable as recent years. So, people are just protecting their liquidity in a way that they did not a year or two ago,” he said.

The big change has been in the number of people interested in lower-quality farms.

“In the fall of 2022, we would have seen upwards of six or eight active bidders at every auction, regardless of the quality. In 2023, there were two or three fewer bidders at all the sales, including best-quality farms. When it comes to the B and C quality, the market is much thinner than a year ago,” Hensley said.

Farmers still are lining up to buy those “once-in-a-lifetime” farms.

“If you are in a neighborhood where a really high quality farm is coming on the market, you only get one shot to buy a farm. You buy it when it’s available, not when it’s convenient,” Hensley said.

“But it seems like the threshold for taking those risks got a little higher in 2023 because margins are tighter. The lesser-quality farms are less worthy of somebody sticking their neck out. That is what we are seeing, there are fewer people really willing to compete and participate for those B and C quality farms.”

Hensley said he will be keeping an eye on several factors that impact farmland sales and value.

“No. 1 is commodity prices. That establishes a baseline level of profitability and interest from farmers and non-farmers alike for making a living and creating a return on a farm. I am paying attention to input prices, as well, because that impacts profitability and margins at the farm level and that goes along with commodity prices,” he said.

While interest rates affect value and sales, the impact from higher rates has yet to be felt heavily in the farmland market.

“I think we have seen very little impact thus far from the higher interest rate environment as it relates specifically to farmland. Most farmland buyers still are not borrowing a lot of money to make purchases. Most of the purchases are being powered by liquidity and strong earnings from the last several years,” Hensley said.

The most obvious recent impact of higher interest rates was that investors started to move away from the farmland market.

“Two years ago, farmland at 3% return was really good and you had an investor crowd that was paying attention to farmland as an asset class because it was competing really strong versus other investment alternatives,” Hensley said.

As interest rates and the price of farmland rose, investors have found alternative places to store their money.

“I think the investor crowd has been drawn away from the farmland market, more so in the past year with higher interest rates simply because you can go to any local bank or community bank and get a 5% almost risk-free return on a short-term or medium-term CD. Compared to farmland, that looks pretty good, especially with farmland having had this strong run-up in prices in the last couple of years,” Hensley said.

While the percentages of farmers versus non-farmers buying farmland may bobble, farmers remain the biggest buyers of farmland.

“It kind of depends on the economic environment, but farmers are, by and large, the vast majority of the buying public and then the balance of farms are bought by local and non-local investors,” Hensley said.

Another trend that Hensley watches, to gauge value and interest in buying, is sale volume on a local level.

“You can have a market that, marketwide, may not be strong. If you go into a neighborhood with a really nice farm where nothing has sold in recent months, you can have some local, pent-up, demand,” he said.

“On the flip side, if you have a neighborhood where half a dozen farms have sold in recent years or recent months, the seventh or eighth farm comes to the market, you have some localized weakness, just because there is not as much dry powder, so to speak, from those local buyers to participate.

“Every one of these townships is a micro market. If you go 15 miles in any direction from where you are sitting, you are in a little different market. As we look at sale volume overall, it does play a role in how strong or weak the market would be in a localized situation.”

The type of sale can also impact value and interest.

“It is part art and part science, being able to judge whether a farm is best offered through public auction or whether it should be offered through private brokerage, the sale method that should be used,” Hensley said.

“At an auction, you need at least two buyers who will compete through the end for an auction to go through. For a brokerage, you only need one.”

One factor that hasn’t yet made an impact is the arrival of solar farms on farmland.

“I haven’t seen a significant impact of any sort from those renewable projects. The solar is newer and it’s changing the underlying use of the property, so that is probably the biggest thing that is different from the wind energy projects,” Hensley said.

“The reality is that solar has impacted so few acres that I don’t know that it has any meaningful impact, other than for those people who are transitioning those acres out of production. They are enjoying the substantial payments they are receiving for doing so. It hasn’t changed our farmland market.”