The agriculture real estate market entered a period of de-escalation beginning in the fourth quarter of 2022, reports Omaha-based Farmers National Company (FNC). In its July semi-annual update, the firm says the market experienced a reduction in both sales volume and value growth since that time, as interest rates increased, and inflation pressures became more apparent.
That trend has continued into the first half of 2023 with fewer properties being offered for sale and market values that, while still strong, are dramatically off the pace seen in the first half of 2022.
Results from the Federal Reserve District Surveys reflect this trend between the third and fourth quarter of 2022 and now continuing into the first half of 2023. Value growth is still positive across the Midwest, but increases are now in the single digits instead of the double digits seen in 2021 and 2022, FNC says.
Farm operators remain the largest group of buyers through FNC, accounting for nearly 80% of all land sale transactions, the firm notes.
“These operators have enjoyed a period of high liquidity over the past five years but are now moving into a period of increasing debt service and borrowing. This will most likely result in less available cash reserve to deploy for capital expenditures and land purchases,” states Paul Schadegg, FNC senior vice president of real estate operations. “While investors have not always been the successful buyer of properties offered for sale, they certainly are part of the equation, helping set a floor on land values and creating a competitive market. If farm operators step back from aggressive bidding for land, investors will most likely step in to take advantage of purchasing options.”
There continues to be a strong appetite for agriculture properties from individuals considering farm expansion and investment opportunities due to positive attributes of the ag economy. That overall bullish outlook for the ag economy will continue to drive the demand for high quality cropland, Schadegg notes.
Commodity markets will remain the primary driver in land sale activity and value moving forward, he states.
“With that said, profitability is what will determine what the land market will bear. So, we must consider rising interest rates, inflation and supply chain into the overall picture,” he cautions. “Landowners continue to look for opportunity in the agriculture land market, deciding if this is the best time to sell at historic values or retain ownership of what continues to be a very valuable asset.”
FNC’s sales volume through the first half of 2023 continues to exceed the five-year average but is slightly off the “exceptional” pace set in 2021 and 2022. Motivated buyers continued to drive bidding at late spring sales, resulting in stable and strong values across all classes of land, Schadegg comments.
“Looking ahead to the second half of 2023, we anticipate strong competition for high quality land offered for sale. The overall U.S. agriculture economy is healthy with Midwestern banks reporting increased operational lending but strong loan performance and projections for a profitable 2023 growing season. Our pipeline for scheduled fall sales is beginning to fill at a typical pace with buyers and sellers of farmland requesting information on upcoming sales,” Schadegg says.
“We remain confident the strong demand for quality agriculture land will continue through the year. That opinion, coupled with the stable ag economy and a supply/demand scenario favoring the landowner, will maintain the current and long-term value of farmland across the U.S,” he adds.