What impact will elevated interest rates have on farmland values?

What effects will interest rates have on farmland values?

In 2022, agriculture ended on a banner year. Despite pressures from higher input costs as well as interest rates, strong commodity prices carried farmers into net positive balance sheets with healthy cash flows.

Adding to this picture was the continued growth of farmland valuation. Even if farmers are not looking to acquire additional land parcels, increased valuation moves the needle on their land-to-value ratio (LTV). A lower LTV translates into greater borrowing power for farmers, because they can leverage that into additional capital to enhance their operations.

Farmland valuation: The data

A look at farmland valuation trends. According to Creighton University’s February 2023 edition of the Rural Mainstreet Economy Report, farmland prices advanced for 30 straight months.1

While land values vary by region and state, the 3-year trends from the USDA’s Land and Values 2022 Summary2 from August 2022 demonstrate solid growth in farmland across the U.S.:

Cropland values per acre

  • 2020 — $4,100
  • 2021 — $4,420
  • 2022 — $5,050

Average pasture value per acre

  • 2020 — $1,400
  • 2021 — $1,480
  • 2022 — $1,650

Farm real estate value per acre

  • 2020 — $3,160
  • 2021 — $3,380
  • 2022 — $3,800

Will farmland valuations decline in 2023?

After months of anticipating a braking effect from elevated interest rates, signs of stabilizing farmland values were already showing in banker survey findings from the Federal Reserve Bank of Kansas City3, which covers states in the great and central plains.

According to the Fed’s March report:

  • States that were most impacted by drought were showing prices that were somewhat easing or remaining steady.
  • A majority of bankers expect higher interest rates to cool interest in purchasing farmland.

Said one banker from Western Missouri: “Although higher interest rates should negatively impact the demand and values of farmland being sold, it hasn’t impacted the valuations yet. In fact, farmland has been selling higher than ever and farmers have a lot of liquidity and must be looking to real estate as a good long-term investment.”

For farmers who were planning to expand their operations, refinance or introduce a new product line, higher interest rates can create a barrier for their plans to expand, because it raises the cost of borrowing capital. So if interest rates remain elevated, will they cause a reversal in land values? The consequences could mean a higher LTV ratio for some borrowers, which in turn affects the volume of capital they can borrow. However, expect farmland prices to remain steady, and here’s why.

  • Farmland is an investor magnet during times of inflation because it generally holds its value, unlike stocks, bonds and other financial assets.
  • Higher land rent often accompanies higher costs per acre, which can motivate producers to stabilize their operation costs through a land purchase.
  • Interest rates fluctuate, so investors and buyers may be taking a longer-term view of the investment with intentions to refinance.

Our lending solutions expand your lending power

Without a doubt, higher interest rates drive up the cost of financing for farmers, which puts even more pressure on cash flow. To help farmers take full advantage of their borrowing power through higher land values, you need lending solutions that give you the latitude to offer relief through extended terms.

Agri-Access offers participation loans that expand your lending power so farmers can better capitalize on theirs. With our lending solutions, producers gain the leverage to free up working capital without the added risk to your lending organization.

Discover how you can grow your loan portfolio while reducing risk by downloading our eBook.

  1. Rural Mainstreet Index (RMI) February 16, 2023 | Creighton University
  2. Land Values 2022 Summary | USDA
  1. Growth in Farmland Value Continues, but Higher Rates Temper the Outlook | Federal Reserve Bank of Kansas City

Let’s discuss how we can expand your ag lending power.