If we could sum up the 2022 farmland market in a single word, it would be: booming. The question is: will the boom continue into the rest of 2023?
As you can see from the chart below, farmland values in five major growing states increased significantly in 2022 vs. previous years:
Unfortunately, there are some signs that the market in 2023 is cooling. So what’s the outlook for 2023? What should landowners and farmers expect for the rest of the year? Here’s a breakdown of what to expect.
So is the market actually cooling in 2023?
The short answer is yes. But as with anything regarding market dynamics, it’s a complicated picture.
There seems to be a 21% decrease in net farm income from 2022 to 2023 (USDA). In Illinois specifically, there’s an 84% decrease in farmer returns on high-productivity (Illinois Farm Business Management).
So what does this mean? Farmland prices are highly correlated with farm income and farmers’ productivity. As these go down, it’s a sign that prices will follow.
But let’s consider this in context. 2022 was a hot year. So even if things cool in 2023, it’s possible the market will still remain strong.
And when we look at the market holistically, that’s exactly what we see: a strong farmland market continuing into 2023.
Or, as a recent report from DTN puts it: sales will be strong, but not record-breaking.
Here are some of the reasons why this is the case.
Strong commodity prices incentivize farmers to expand. What’s more, Farm Credit Services of America reported that, based on December 2023 corn futures price of $5.96 per bushel, corn yields of 211 bushels per acre are required to break even. Other commodity crops seem to follow a similar pattern.
The primary reason for this sudden change is an annual increase in input costs. Direct costs will rise 45% this season, and machinery costs are 26% higher than just two years ago.
Given 2022 averages of 173.3 bushels per acre, this means that crop yields will need to be incredibly high to be profitable. Additionally, lower margins means that farmers will need to pick up new ground just to keep up with last year’s numbers.
All of this means that the demand for farmland is rising rapidly. However, at the same time, farmland supply—especially high-quality farmland—isn’t keeping up. Some data indicates as many as 2,000 acres of farmland are lost per day.
Simply put, there are more interested buyers than sellers. Even as other factors cool, this high demand will provide major support to farmland prices this year.
Investors have long considered farmland a good hedge against inflation and overall market volatility. It’s a static resource, and the constant (in fact, increasing) demand for food means that there will never not be a need for farmland.
As such, many investors are moving their investments over to this valuable asset class. In fact, People’s Company Auctions seems to show a growing percentage of farmland buyers that aren’t farmers themselves.
There was some question as to the impact of interest rates on the sale of farmland. But according to that same report from DTN mentioned earlier, there doesn’t seem to be much of an impact.
Part of the reason for this could be that there are multiple ways to make money off of farmland. From seasonal crops to energy farming, double cropping and agritourism, the potential for multiple revenue streams could offset the rising interest rates.
Farmland value is partly dependent on the overall optimism in the market. Fortunately, farmers are hopeful regarding the stability of their land.
Despite the pressures mentioned above, there are a number of reasons farmers should be optimistic about the future:
So here’s the question: should you pick up new ground in 2023, or sell off what you have?
Overall, it looks like the best decision for your farming operation holistically is to buy, not sell. Here are some reasons why that’s the case.
NOTE: This information is intended for educational purposes only. It is not intended to replace the advice of a financial advisor or other qualified professional.
The biggest factor favoring farmland expansion is the decrease in profitability we mentioned earlier. If you have any residual cash from the high productivity in 2022, you may want to consider reinvesting.
So while the profitability of each acre may be low, by increasing the number of acres you operate, you can keep that topline number strong.
Steady farmland prices in 2023 mean that it’ll be easier to make projections for the rest of the year. Odds are, there won’t be any major dips or surges this year. So if you’re looking to buy, now is the time.
Food demand—and, by extension, crop and farmland prices—are impacted heavily by market volatility. Weather, water shortages, inflation, the ongoing war in Ukraine, and other factors increase the value of food, which is good news for farmland owners. So long as these conditions persist, and all signs are that they will, landowners are in good shape for 2023.
As you can probably tell, the farmland market in 2023 is a mixed bag. Although we’re definitely coming down from a hot 2022, it looks like farmland prices will be well-supported in 2023.
However, one of the biggest factors that will impact buying decisions is the drop in farmland profitability this season. This means that if you want to keep your overall profits at current levels, now is the time to pick up new ground.
