Agricultural land prices go up and down based on a variety of factors, from government policies to crop production. Knowing how they change helps you choose the right time to invest.
The current land price forecast is positive for agriculture. According to the USDA’s Land Value Report, agricultural land is worth an average of $4,530 per acre. That’s an increase of $180 from last year.
Interest rates indicate the entire economy. They are the second most important factor, after farm income, to determine farmland values.
What Influences Agricultural Land Prices?
Several factors influence farmland value. They need to be considered along with interest to decide when and where to invest.
Commodity Prices
Commodity prices refer to the value of crops such as:
- Soybeans
- Corn
- Wheat
When they go up, farmland becomes more profitable. Demand and land values also go up.
Land Productivity
Land productivity is often measured by CSR2 (Crop Sustainability Rating System 2). Higher scores mean more fertile land and higher prices.
Location
Being near urban areas or major transportation routes fetches higher prices. They have easier market access and future development potential.
Government Policies
Government policies affect how valuable farmland can be, such as:
- Subsidies
- Conservation efforts
- Tax incentives
The CSR2 also pays farmers to remove environmentally sensitive farmland. This can increase the value of their other acres.
There are also tax benefits to owning agricultural land. One of the most important is the 1031 tax exchange.
Climate
Consistently poor weather decreases farm value. Areas with stable weather fare better.
How Do Interest Rates Affect Agricultural Land Prices?
Interest rate changes have a major impact on agricultural land prices. Higher interest tends to lead to higher prices and fewer loans, but there are also other factors to consider.
When Interest Rates Rise
Rising interest rates increase borrowing costs. This lowers the borrowing power of investors.
Demand declines alongside potential returns and valuation multiples.
When Interest Rates Fall
Low interest rates lead to cheaper financing costs. This boosts demand and leads to higher land values.
Counteracting Factors
High commodity prices and high farm incomes can offset high interest rates.
Farmland is often viewed as an inflation hedge, making people more likely to buy even when interest rates are high.
Prices may remain high due to limited demand. This also happens when the industry is supported by high income.
Interest rate increases lead to slow growth rather than a rapid decrease.
How High Interest Rates Affect Buyer Behavior
Interest rates change how agricultural land is bought and sold. When interest rates are high, so are borrowing costs. It affects short-term and long-term financing. Investors are pickier.
Lenders also have tighter standards. It’s difficult if you don’t have perfect credit. Farmers need options and good documentation.
Buyers and sellers are more cautious. They don’t go for properties with low land values. However, it’s still seen as an investment, so demand won’t go away completely.
High interest rates for land tend to also affect renting for farm equipment or grain storage, making entire operations more difficult. Farmers need to plan ahead and consider inflation to protect their bottom line.
There can also be a “lock-in” effect during times of high interest. Buyers keep land with lower debt due to decreasing demand.
How Can You Value Farm Land?
When determining how much farmland is worth, check statewide land values. Look at all the factors influencing the market, including:
- Soil
- Tillable access
- Location
- Drainage
- Farming practices
- Yield history
- Soil fertility
- Government programs
- Interest rates
- Supply
- Commodity prices
- Weather uncertainty
Then, focus on your individual property. Research any factor that could affect your valuation. These may include:
- Topgraphy
- Access
- Configuration
- Size
Future Farmland Value Trends Across the Midwest
Global farmland value trends to consider include technological innovations and changes in food demand. There are also fluctuations affecting the Midwest farmland.
Ioawa
Iowa is dominating the agricultural land market. It has a strong agricultural infrastructure and leads in the production of important products such as:
- Corn
- Soybean
- Ethanol
Agricultural land prices in Iowa fluctuate due to increased competition. Commodity prices also fluctuate but remain relatively stable.
Iowa is an ideal state to use as a starting point for entering the real estate market.
South Dakota
South Dakota has an increasingly strong agricultural portfolio. It’s also growing in soybean and corn production thanks to irrigation improvements. Land values are rising, but they’re more affordable than in Iowa.
South Dakota is increasing its focus on renewable energy, especially wind. Farmers lease part of their land to wind farms for more money.
It’s important for South Dakota farmers to realize they may not have large yields all year. The state has shorter growing seasons and is susceptible to extreme weather.
Minnesota
Minnesota produces diverse crops, including:
- Wheat
- Corn
- Soybeans
The state is investing in drone monitoring and other tech. The state is also focusing on sustainable conservation tillage processes.
Frequently Asked Questions
Does a 1% Interest Rate Make a Difference?
Yes, a 1% change in interest rates can make a major difference. It’s especially important for mortgages or land loans.
It can raise these types of loans by tens of thousands of dollars in interest. You’ll also face higher monthly payments.
A 1% change in interest may not seem like much, but it’ll change your agricultural investment options. An increase can reduce your borrowing power by 10%. A $30,000 loan at 3% could cost $1,011 per month. It’ll go up to $1,145 per month at 4% interest.
Do You Have to Put 20% Down on Land?
Yes, many loans do require a 20% down payment. It can even go up to 50%. Lenders see land loans as riskier than existing home loans.
However, there are cheaper options. According to the Farm Service Agency (FSA), the down payment on a farm ownership loan is around 1.87%.
Find the Best Agricultural Land Today
Agricultural land prices are affected by a range of factors, from crop yields to weather. Interest rates are one of the most important factors. Even slight increases or decreases significantly affect borrowing power and behavior.
Midwest Land Management and Real Estate, Inc. was founded in 1988. We have over 35 years of experience in the business. We assist clients with farm real estate management and crop insurance. We’re independently owned, allowing us to create a plan that meets your specific needs. This allows us to create long-term, sustainable client relationships.
Contact us to get started today.