5 Key Trends in the Current Farmland Market
As we reflect on a challenging 2019 growing season and harvest and look forward to 2020, what factors are influencing the farmland market? Here at AcreValue we are committed to helping people associated with farmland save time and build better relationships using technology and data. In doing so, we have the opportunity to visit with farmers, landowners, and land professionals from across the country. From these conversations and our own market research, here are the key market features we’ve identified:
1 – Prices are Supported by Lack of Supply
Current farmland prices are supported by excess demand — in other words, there is limited supply of land on the market in most areas. The majority of farmers are in a strong enough financial position that they are not forced to sell, and most investors are holding their land for the longer term. Individual landowners who have retired from farming or who have inherited ground are content to retain ownership, since opportunities to reinvest sale proceeds are limited (e.g., the stock market is exceptionally strong, and interest rates are near record lows). In short, the turnover rate of farmland has historically been very low and stable. Illinois data shows that turnover is about 1% per year, and USDA data suggests that sales between non-related parties is about 2% of total transfers. There is nothing to suggest that this will change in the foreseeable future.
2 – Strong Interest by Neighboring Farmers will Continue
Despite a recent decline in working capital, many farmers have saved adequate funds to participate in strategic farmland purchases. When a property comes up for sale, there is typically a farmer who owns or rents adjacent land who’s interested in and financially capable of acquiring it. In fact, when two or more adjacent farmers want to purchase, very strong sale prices continue to be observed, particularly when the property is offered at public auction.
3 – Investors Remain Committed to this Asset Class
Demand for farmland as an investment remains strong from both individual and institutional investors. This asset class is key for diversification and a hedge against inflation, and remains an attractive home for long-term, patient capital. Since investor purchasers are driven by specific return goals, they will not pay the same premium/strategic price that two farmers competing over a parcel that adjoins them might. Investors will continue to be active buyers of “A” and “B” quality farms.
4 – Farms With Blemishes are a Harder Sell
Prices for top quality farms in most regions are stable to higher. However, less attractive farms are a more difficult sell. A parcel that’s poorly drained, lower in fertility, has irregularly-shaped fields, has poor access, or has uncertain irrigation water availability will often sell at a substantial discount — or it may not be marketable at all. For example, consider the following two farms, both of which consist primarily of “class B” soils. The farm on the left has a value estimate on AcreValue of $7,623 per acre. In contrast, the farm on the right — which is cut into irregularly-shaped tillable fields by drainageways — has an AcreValue of $6,748.
5 – Local Markets Really Matter
Despite general trends, the local market is a critically important driver of land values. For example, if none of the neighbors are in a position to buy a farm when it comes on the market, it could be a tough sell. Or in a neighborhood with strong demand from livestock farmers who need a place to spread manure, sale prices for ideally-located tracts could set new records. Additionally, in an area where 2019 harvest results were poor or where farmers are financially stressed, land values may be lower.
These key characteristics have resulted in remarkable stability in land values in most states. In support, the USDA reports that cropland values either increased or remained unchanged in the majority of the U.S. (Land Values 2019 Summary, page 6). Unless and until there is some major event or set of unforeseen circumstances, this is unlikely to change.
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