I recently wrote an article for AEI Premium (here) discussing the key factors I’m watching for farmland in 2023.
Coming off two years of very strong increases in sales prices, the question for 2023 is whether farmland prices will go higher yet, sustain the gains and plateau at current levels, or soften and experience declines in values. For farmland prices and market activity, 2023 stands to be a pivotal year in setting the direction of land values for the next several years. With this in mind, here is a short summary of the factors to keep in mind:
Projections for lower farm profitability will take some steam out of the land price push.
The strength of net farm incomes and farmers’ cash flow since 2020 was a major factor in the rise of farmland prices in 2022. Margins will be tighter in 2023 and the potential of lower profits will dampen farmer enthusiasm for bidding up land prices.
Higher interest rates will negatively affect the demand to push land prices higher.
Interest rates on land mortgages more than doubled in 2022 and the effect of high interest rates will start to be felt in 2023. This will take a few buyers, both farmers and investors, out of the market which will, in turn, remove some of the demand push on prices.
The supply/demand situation in the land market is supportive of steady prices.
The pace of land sales has slowed back to average or below while recent demand has stayed strong enough in most areas to keep cropland prices strong or at least flat. With average or less-than-average land expected to be sold in 2023, demand will probably be adequate to maintain price levels in most areas of the Grain Belt.
Inflation is supportive of land prices for now.
The threat of rising inflation finally became a reality in 2022 after years of prognosticators forecasting it. The expectation of higher inflation generally supports the ownership of farmland. The inflation effect may wane to a degree in 2023 as inflation rates are expected to decline throughout the year.
Uncertainties facing world food and agriculture support land values in the U.S.
Uncertainties remain in 2023 for factors that will affect agriculture and land prices. These include world weather and crop yields, water shortages, inflation, interest rates, recession, and the ongoing war in Ukraine. Until each of these factors plays out, the unknown will probably support owning farmland and therefore land prices.
Land price trends point to a time-out in the up moves.
If you look at the graphs of land price changes and value trends, there have now been two large run-ups in prices since 2007. In 2014, we saw the beginning of lower to flat land prices over the following five years. Once again, the last several years have seen double-digit annual increases in land values and new record prices. It is, or soon will be, the time for the land market to take a breather, which would indicate a pullback of some sort in prices.
Wrapping It Up
Owning farmland is a long-term investment and a number of the factors that support land prices in the U.S. will continue beyond the short-term outlook for prices in 2023.
To sum up the outlook for farmland prices in 2023 – it is a mixed bag. Several factors are supportive of the current prices for good cropland while others may exert a drag on bidding and soften prices.
Ultimately the marketplace, which brings together the sellers and buyers of farmland, will determine the direction of farmland prices over the next 12 months. With everything going on in the world and in agriculture, 2023 stands to be a pivotal year for numerous reasons.