Land Values Are Rising - What’s Driving This Growth?

Land valuations are complex. They are often determined by various variables, including interest rates, the strength of the U.S. dollar, and a host of broad macroeconomic conditions. For farmland, there’s an additional layer of complex variables at play. These include commodity prices, food demand, supply constraints, and even technological advancements.

In today’s economic climate, there are many favorable conditions that have caused land prices to rise – and there’s reason to think farmland values will continue to climb in the near future.

Let’s explore what’s driving this spike in farmland values and why now might be the right time to invest.

Recent Farmland Valuation Activity

Farmland values have been rising across the country. Last year, irrigated cropland values in California reached an average of $16,300 per acre, the highest valued cropland among agricultural states. In 2021, Oregon farmland real estate values grew 10.3% year-over-year – the only West Coast state to experience double-digit growth. Meanwhile, Washington cropland saw a 7.2% year-over-year increase in cash rent prices. So far, in 2022, farmland prices in the Pacific Northwest have increased by an estimated 20%.

Farm values in the Midwest continue to surge as well. From April 1, 2021 to April 1, 2022, Iowa farmland values increased by 28% on average. Indiana farmland values were up 23% year-over-year, while Illinois saw an 18% increase in the same time frame. As commodity supplies from Russia and Ukraine are constrained, these Corn Belt states continue to benefit from decade-high domestic corn futures prices.

In 2021, the Northern and Southern Plains were the only regions to collectively see at least 9% year-over-year valuation growth across all states in the area. Oklahoma, which faced the slowest increase in values across all land types, still saw increases of at least 12% from December 2020 to December 2021.

Factors Driving Farmland Valuation Growth

Several factors are driving farmland values to new records:

Long-Term Supply and Demand

Globally, the amount of arable farmland is steadily decreasing; between 1992 and 2012, almost 31 million acres of agricultural land were irreversibly lost to development. In 2021 alone, the United States lost 1.3 million acres. This decreasing supply is creating long-term pressure that should inherently preserve farmland’s value over time.

Simultaneously, farmers worldwide are facing increased pressure to produce more food, with forecasts projecting that the world’s global population will reach nearly 11 billion by 2100. As more people rise from poverty to the middle class, demand for high-quality crops, like meats and proteins, is projected to increase. To meet the demands of the future population, food production will need to increase by 70% by the year 2050. This growing demand, coupled with a decreasing supply of farmland, can create positive, long-term tailwinds for farmland values.

Current Economic Factors

In addition to long-term supply and demand trends, several short-term macroeconomic trends impact farmland valuations.

Following the financial chaos caused by the COVID-19 pandemic, investor preferences have shifted toward assets with historic diversification and stability. With inflation hovering over 9%, more investors are looking toward assets that can offer inflation protection, too. Farmland can offer investors these characteristics, and more.

Furthermore, in an attempt to curb rising inflation, the federal funds rate is on the rise, with a new target rate range of between 1.5% and 1.75%. Generally speaking, higher interest rates increase the value of a given country's currency; today, the U.S. Dollar Index (DXY) is currently at its highest value since 2003. As a result, the U.S. is beginning to see an influx of foreign investors seeking the increasing yields of domestic assets.

As investor demand for these assets increases among both domestic and foreign investors, so too will the underlying value.

Operating Factors

Due to global supply chain issues, international conflict, and rising input costs, commodity prices continue to soar. Agriculture commodities increased more than 23% in value in 2021, and it’s estimated that non-energy commodity prices, including agriculture staples, will increase 20% in 2022. Given that Russia and Ukraine are key exporters of both wheat and corn, domestic commodity producers face pressure to meet the global demand. In turn, Midwest farmers have already seen their land values rise.

Additionally, advancements in agtech are improving operational efficiency, which can lower operational costs and increase farmers’ bottom lines. As farms improve operational efficiency, the agriculture sector has the potential to add an additional $500 billion to the world’s GDP by 2030. In fact, by 2025, the market value of the agtech industry is expected to surpass $22.5 billion.

How Rising Farmland Values Can Impact Your Portfolio

When you invest in farmland, you gain exposure to two main sources of returns: appreciation in the value of the land itself and annual income from the farm's operations. These sources of returns are tied to how the farm is managed – whether through a lease agreement or direct management contract – as well as the types of crops grown.

In a lease agreement, most commonly seen with row crops like corn and soy, a tenant operator will oversee the daily management of the farm while paying the landowner a rental fee. Rental fees are often derived as a share of crop income or as a function of the land’s appraised value. In these situations, as the land value increases, the annual rent payments to the landowner may also increase. In addition to benefiting from rising land values, these agreements also grant farmers more flexibility to rotate varieties in and out of production based on global trends – such as planting varieties, like wheat, that are in high demand. Last year, in 2021, the average rental cost per acre of farmland in the United States increased by 1.4%.

Alternatively, with direct management agreements, most often used for permanent crops, the landowner pays a professional farm manager an annual fee for the services of operating the farm. Thus, the annual income you earn during the hold period is directly linked to gross crop income, rather than land valuations. In this case, investors are exposed to various factors that impact crop prices, such as organic certifications or technological improvements. Thus, returns for permanent crops are often higher than for row crops.

In both a lease agreement and direct management agreement, the landowner retains full ownership of the land and reaps the long-term benefit of land value appreciation.

Capitalizing Rising Farmland Values

Farmland is poised to remain a strong investment throughout 2022. Rising cash rents, booming agtech innovation, skyrocketing commodity prices, and more continue to drive farmland values to new levels. By diversifying across geographic locations, management structures, and crop types, investors can capitalize on a variety of global trends.