The value of all types of farmland in the district served by the Kansas City Federal Reserve Bank grew by almost 8% on an annual basis through the second quarter, reports the bank’s update on district ag credit conditions. The bank’s survey found the value of dryland cropland rose 7.7%, the value of irrigated cropland rose 7.8% and the value of ranchland increased 8.1%.
While strong annual percentage increases, they represent a decline from the eye popping increases recorded just a year earlier. During the second quarter of 2022, the value of dryland cropland boomed 21.3%; irrigated cropland surged 19.1% and ranchland jumped 17.7%. The first quarter of 2023 saw dryland up 9%, irrigated up 9.2% and ranchland up 10.7%.
Despite this deceleration in year-over-year gains, the bank notes: “Growth in farm real estate values remained relatively strong despite the rapid rise in interest rates and some moderation in the farm economy. Although the average rate of growth for nonirrigated cropland declined from more than 20% a year earlier, continued strength in farmland markets has occurred alongside more pronounced softening in cash rents. Cash rents for ranchland declined slightly in the second quarter. That was for the first time since 2020 and rents for cropland increased by only 1%.
The bank goes on to note: “Considerable strength in farmland markets has pushed values above what may be expected given the current interest rate environment and prospects for financial returns from cash rents. Reported values of farmland in the district have continued to rise steadily in recent months as the estimated value based on the relationship between cash rents and benchmark interest rates (capitalized value) has dropped considerably.
“Capitalization values provide a way to evaluate the combined effects of interest rates and returns and have declined alongside the rapid increase in interest rates and a moderation in cash rents. Some moderation in farmland values could be expected given these downward pressures, particularly for more marginal or less productive tracts, however, a steady supply of land sales and strong demand from farmers has likely supported broad resiliency of real estate values,” the bank comments.
Agricultural credit conditions in the district moderated in the second quarter while farmland values continued to increase, the bank notes. Following multiple years of considerable improvement, farm incomes softened and borrower liquidity retracted somewhat alongside continued cost pressures and lower prices for most agricultural commodities compared to a year ago. Although cost increases have been more modest in 2023 than last year, many agricultural lenders expect loan demand to increase and repayment rates to decline in coming months. Despite sharp increases in interest rates and a notable slowdown in cash rents, farmland values still grew at a strong pace.
Percent Change in Farmland Values and Cash Rents
Change in Capitalization Rates versus Land Value