US Farmland Prices Reach All-Time High Despite Real Estate Downturn

The cost of purchasing a piece of land in rural America is at an all-time high, even with the current high interest rates.

This year, farmers have seen unprecedented profits due to the increase in commodity prices, leading to a surge in demand for land to cultivate in 2023. This demand has been further amplified by the influx of people to rural areas during the pandemic, as non-metropolitan areas have grown faster than urban ones, and investors have looked to fields as a way to protect against inflation.

In the third quarter of the year, farmland prices in the Midwest, the nation's primary agricultural region, experienced a 20% increase from the same period in the previous year. This was in contrast to the decline in residential real estate prices. This marked the eleventh consecutive quarter of growth, the longest streak since 2014, according to data from the Federal Reserve Bank of Chicago and the National Association of Realtors.

Jim Schultz, the head of Open Prairie, a private-equity investment firm located in central Illinois, is of the opinion that farmland prices could double in the next decade. This is after the 13,000 acres he purchased between 1987 and 1992 for $750 per acre have now increased in value by a factor of 16.

Schultz expressed his opinion that a decade-long trend is just beginning and that his company is in a great spot. He also made it clear that he has no intention of selling.

Growers in the United States are seeing an increase in their profits due to the disruption of supplies from Ukraine, a major producer of corn, wheat, and sunflower oil, caused by Russia's invasion. According to the US Department of Agriculture, this has resulted in a 14% rise in farmer profits to almost $161 billion this year.

The demand for farmland has increased in correlation with changes in population due to the pandemic. According to the USDA, the number of people living in non-metro counties rose 0.3% in the 12 months ending in July 2021, marking the first time since the mid-1990s that the growth in rural population has surpassed that of urban areas.

Tom Halverson, the CEO of CoBank, a cooperative lender that serves rural America, noted that the growth of broadband and the capacity to work remotely have been major contributors to the shift.

Recently, rural America has seen an increase in population for the first time in many years, according to a statement made on Bloomberg TV. It is hoped that this trend will continue, although it is likely to be unevenly spread throughout the country.

As the world moves towards clean energy, farmland has become increasingly attractive to owners looking to capitalize on the trend. BloombergNEF predicts that the demand for renewable diesel, which is created from vegetable oils but has the same chemical properties as petroleum-based fuel, will triple in the next five years.

In the five years leading up to 2017, the number of farms with photovoltaic installations doubled, according to the most recent USDA census of agriculture. Despite this growth, only 6.5% of total farmland had renewable energy assets, indicating a large amount of potential that has yet to be tapped. Growers have the opportunity to install solar panels and wind turbines on their land.

Agricultural producers have the potential to benefit from carbon sequestration, as the amount of money Indigo Ag pays farmers for carbon has increased significantly over the past two years

.It is possible that the farmland market could be affected by increasing rates and the potential of a US recession in the coming year. Luke Worrell, a farmland broker in Jacksonville, Illinois, has estimated that prices for grade-A plots could drop between 2% and 5% in the next year.

According to Worrell in an interview, the two biggest buyers of farmland are being affected by both decreasing returns and higher interest rates, creating a double-whammy. He noted that the market has been unpredictable, but it is important to be prepared for a potential downturn.

Matthew Fitzgerald, a farmer from McLeod County, Minnesota, has found that the most difficult obstacle for young farmers is the cost of land. He was able to expand his family's 200 acres to around 2,500 acres with the help of a USDA program. Additionally, he has partnered with AcreTrader, an agriculture-land investment platform, to purchase land that he then oversees and co-invests in.

Fitzgerald, 31, expressed his confusion over the current state of farmland prices in a phone conversation. He likened Midwest commodity farming to the mafia, noting that it is difficult to be competitive and acquire land without having a connection or a large amount of money.

As the world's population continues to increase and the climate continues to change, the Midwest's fertile land is becoming increasingly important for global food production in the long run.

Investors from outside the agricultural industry are increasingly showing interest in farmland. This is because it is seen as a great way to protect against inflation, as the commodities produced on the land tend to increase in value when prices in general go up.

At a conference in Champaign, Gary Schnitkey, a professor at the University of Illinois, highlighted the value of land as an asset. He suggested that owning land is a great way to diversify one's portfolio, as opposed to investing in cryptocurrency.