The farmland market in the second quarter of 2023 continued the transition that began earlier in the year. Fewer sales, few – if any – new record prices, more cautious buying, and changes in demand for less-than-top-quality land lead the transitions that are taking place. These changes are in response to the farm economy and will probably continue into the third quarter of 2023.
Spring Slow Down
The April-June period normally sees far fewer sales of farm and ranch land, and this year is no exception. Farmer buyers are busy planting and tending the new crop, while investor buyers are waiting to purchase the farm clear of any existing leases. Historically, almost no farms used to be sold during this time. Today, farms are sold year-round, albeit far fewer transactions take place during the spring period.
The amount of land for sale compared to the busy past two years started to lessen when the calendar turned to 2023. Anyone who was thinking of selling, and could time the sale, more than likely took advantage of the recent large run-up in land prices and put their farm on the market to capture the top prices being paid for good cropland. It makes sense that the pace of sales would now slow down. The slower pace of listings and auctions continued in the second quarter and will be the starting place for the pre-harvest sale season.
A Different Outlook
Anyone following land values for the past few years is well aware of the record prices being set in the Corn Belt states and other regions. Since the first of the year, few – if any – new records have been set. As discussed in previous articles (here and here), farmland is a long-term investment, and one must look at expected future income to make informed decisions about what to pay today for the land. Farm income for 2023 and beyond has started not looking as bright due to higher costs, expected lower grain prices, and higher interest rates. This outlook took some of the steam out of the aggressive bidding, which now limits any new record prices.
More caution entered the market over the past several months due to the lower farm income expectations and because there began to be fewer potential buyers in most markets. Farmers remain the predominant buyers of good cropland, and competition is still there for the occasional farm that comes up for sale. The farmer buyer is more cautious in what they will pay as they take into account the current outlook for their income.
The buyer that may be missing more often than in the past is the investor buyer. The states that normally see investment funds and institutional buyers are now seeing them sit out as they are less willing to pay the same prices as farmers for a specific tract of farmland. Individual investors may also slow their interest in farmland as alternative investments start to look better because of higher interest rates paid on safe investments such as CDs or high-grade bonds.
One of the first indicators of the farmland market taking a pause or softening is that the demand for lower-quality land falls off. If a farm has a blemish, such as it needs conservation work, drainage improvements, or just a general cleanup of appearance, the farmer buyer might not be as interested as in the past. A lower-quality farm with lower productivity becomes less attractive as farm income expectations fall. With the current uncertainty in the outlook for farm income, a farmer buyer will save their finances for a good quality farm.
Another indicator of a slower and softening land market is the occurrence of “no sale” auctions in which the bidding during the auction does not produce an acceptable price for the seller. During a strong and active farmland market, few – if any – “no sale” outcomes occur. Once buying interest becomes more cautious and there are fewer potential buyers, “no sales” can happen. “No sales” can also happen when the seller’s expectation of an acceptable sale price is not in sync with the type of land being sold and the current market prices.
Table 1 summarizes recent farmland reports. While each survey considers a different timeframe, geography, and method, this table hopefully provides some of the context and details. Across the board, values have continued higher, albeit at rates lower than reported a year ago. Of course, activity in early 2023 will take several months to incorporate into reports. Looking ahead, we’re waiting for Purdue’s annual farmland and cash rent report, data from the Kansas City and Chicago Federal Reserve, along with the USDA’s annual reports.
Despite evidence of a slower farmland market, most areas continued to see good demand for high-quality cropland and prices that generally remained strong. No new records, but still solid prices as experienced over the past year. More variability is showing up in prices being paid for similar quality land where one farm may bring a strong price and one may not sell as high. Local factors will continue to influence land prices.
Looking ahead to the pre-harvest sale season, there may be a shift away from auctions to more private treaty listings of land for sale. In a slower market with fewer potential buyers who are not as aggressive, listing the farm for sale may be a better way to control price discovery than a public auction – especially for land that is lower quality or has a blemish.
The next five months will determine if the land market is transitioning to a lower level because of all the influencing factors present or if it is just a pause in the long-term growth in demand and price.