As a key part of our business, we collect and analyze trends in real estate values. Our data covers nearly two-thirds of Iowa and includes land that is at a minimum 75% tillable and sold via an auction or listing.
While we focus primarily on agricultural real estate, the forces impacting values are likely similar for commercial real estate.
Drivers of escalating prices
When evaluating land value trends, we find a few key drivers:
- Commodity prices are the strongest they have been in years, resulting in record high farm income levels. When the commodity prices are high, it is often due to lower yields; however, this is not the case in the current market. With current commodity prices, a farmer can estimate a per-acre Gross Farm Revenue of nearly $1,400 for corn with an average yield ($7 cash corn x 200 bushels per acre) for the 2021 and 2022 crop. This is roughly double recent year revenue of closer to $700 ($3.50 cash corn x 200 bushels per acre).
- Supply of land for sale. One would think higher land values over the last 18 months would result in a large supply of land being made available. During the last half of 2021, significant amounts of land were brought to market due to concerns about proposed tax law changes. That rhetoric has subsided in 2022. Our comparison of the number of acres on the market from our proprietary database for February through April of 2021 and 2022 shows that supply is similar between years.
- Cash is readily available. Many lenders are experiencing low loan-to-deposit ratios as deposits built and fueled by federal stimulus money, reduced spending during the pandemic and supply chain issues reduced loan demand. Agricultural profitability has exacerbated this problem for ag-sector banks, as producers reduced debt in a period of high profitability. Banks make money by lending money. This situation incentivizes lenders to be competitive with loan terms to bring the loan-to-deposit ratios into balance.
Factors working against value inflation
- The rise in interest rates for short- and long-term money. The Federal Reserve is attempting to get in front of inflation and is motivated to rapidly raise rates to lessen that stimulus effect. The Fed can also drain money from the economy by reversing the quantitative easing begun in 2008 by selling securities (taking money out of the economy) rather than buying them (adding money to the economy). This has a multiplier effect on rate increases as the Fed drains some of those deposits from the banks. Long-term fixed rates have clearly responded with rapid escalation. There are predictions that this will lead to a global recession, reducing the value of stocks and real estate.
- Agricultural input costs are rising rapidly. While farm income has risen rapidly, some of this gain will be eroded by higher input prices, including interest rates, rent, seed, fertilizer, crop protection, fuel and equipment. Many farmers were able to lock in their input prices for the 2022 crop last fall, but estimated costs could increase 50% in 2023.
For the next six months, the positives appear to outweigh the negatives for the value of farmland in Iowa to remain steady or grow more slowly. The graph below is data from Growthland sales database for sales in 2022 showing the dollar per Tillable CSR2 point. Each parcel of property has a CSR2 (Corn Suitability Rating) that measures the productivity of that land. By dividing the price received from a land sale by the Tillable CSR2, we can convert a per-acre value to a value per acre based on its productivity compared to other properties. Our data shows a steady upward trend in values since the start of 2022, which appears to support our analysis.
Ben Isaacson and Maurie Cashman are Growthland members.