Farmland values gallop higher despite interest rate increases

Strong commodity prices are creating opportunities for U.S. farmers to profit despite the risks posed by drought and higher production costs, said the Ag Finance Update by the Kansas City Federal Reserve Bank. Farmland prices surged an average of 20% in the Farm Belt during the summer as buyers shrugged off sharply higher interest rates.

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“Demand for farmland has remained strong alongside strength in the farm economy but the acceleration in values over the past year has shown signs of easing in recent quarters,” said the monthly Update. The 20% increase for non-irrigated cropland during the third quarter — July, August and September — was the smallest since early 2021.

Despite the more measured pace, “farm finances remained solid following especially strong incomes across the sector the past two years,” said the report, based on data from regional Federal Reserve banks in Chicago, Dallas, Kansas City, Minneapolis and St. Louis. “Volatility in crop markets, higher expenses and drought are key risks but profit opportunities remained favorable alongside strong commodity prices.”

The USDA estimates net farm income, a measurement of wealth, will be the highest ever this year, thanks to strong global demand and high commodity prices. Warfare in Ukraine has pushed prices higher.

Corn and soybean revenue in the Midwest will be higher this year than last, tempered by slightly lower yields per acre, said David Oppedahl, policy adviser at the Chicago Fed.

Midwest agriculture “has been pretty resilient,” said Oppedahl. Production is strong while input costs are up dramatically. “So that’s creating a bit of pressure on the margins for agricultural producers. And it’s a period when the momentum of increases in farmland values has been maintained even if there’s a slight trailing off from the very fast rates of increase that we’ve seen in the past year.”

Ag bankers said they raised interest rates 85 basis points on farm operating loans and on 110 basis points on real estate loans from the previous quarter. With the rapid increase, financing rates were above the 2015-19 average in all regions.

Increases in farmland values were the largest, for the most part, in states with the highest quality farmland, said the Ag Finance Update. Farmland values in western Missouri soared 34% compared to the third quarter of 2021. In northern Indiana, farmland values surged 29%.