Halderman: 2023 Farmland Values Will Remain Up
by Carolina Keegan
Published: Friday, March 3, 2023
The 2022 farmland values boomed. Almost overnight, rates shot from $50 per weighted average productivity index unit, (WAPI) to $80 per WAPI. The higher the WAPI, the higher the overall land value. Now everyone wants to know, "What will the 2023 farmland market look like?"
Howard Halderman, executive chair of U.S. agriculture and recipient of the Purdue University Certificate Distinction, was featured as a breakout-session speaker at the Ag Women Engage Conference last Wednesday in Terre Haute, Ind.
In the session, he gave his professional estimates, drawing from over 30 years of experience at Halderman Real Estate and Farm Management to discuss farmland as an investment. The company was established in 1930 and is now in its fourth generation, as the speaker's son recently joined the team.
First, Halderman examined reasons farmland goes on market.
"Generally speaking, farmers own land and own it forever. There's really not a desire to sell," he said. "But other people, 60-70% of the land out there is owned by people who don't farm, and, so, why might they sell?"
The two main drivers of farmland sales are interest rates and fear of the unknown, he said. He used the example of the 2012 elections; after August of that year, it became clear that President Barak Obama would most likely be reelected, which caused many to fear an increase in tax rates on farmland because Congress was also Democratic. Halderman reported an influx of farmland sales in that year due to this possibility.
"Really, since that time, we've not seen any outside driver; tax law change or farm bill change, major market moves that would say, 'Hey, landowner, time to exit your farmland asset,'" he said.
The period from 2013-2020 had a below-normal market because of this. It began to pick up some in 2021 after COVID and the Phase I trade agreement, both of which affected land values.
"With farmland, it's not like stocks, where they trade every day and a very open market. Farmland is a much slower-moving marketplace," Halderman said.
Landowners generally sell during the off-season and make a decision to sell within a timeline of years, rather than months, he said. For the 2022-23 off-season, Halderman suspects sales were front-loaded, creating an inflation-adjusted all-time high.
Another thing to consider is that not all land classified as farmland is used in crop production. Recreational, timber and rural residential land values also rose, with recreational land reaching $9,000 per acre. According to the Federal Reserve Bank of Chicago, Indiana led the way in 2022 with a land value increase of over 20% from late 2022 to early 2023.
"Starting in July of '21, it jumped, almost overnight. We had five sales in seven days in August," Halderman said. "And they were all over $10,000 an acre."
In 2021, the annual average was $70.92/WAPI, with the average for the first six months being $54.61/WAPI and the last six months averaging $79.81/WAPI. The jump in July resulted in a 46.6% increase in value. To show the difference, in the first six months, only 15% of farmland sales were over $10,000, but from July to December, 80% were over $10,000.
Bringing it around to the current market status, Halderman said the large volume of sales in the 2022 fourth quarter was indicative of the 2023 market.
"There's more volatility and variation in value," he said. "We're still seeing premium farms sell at premium price, but there are some of those that are not best quality, not in the best location, and they're selling down below $60/WAPI."
Currently, the lead outside driver for low sales is location: If the farmland is in an area with a weaker ag presence, or if an auction is online, sales may be lower than if they were in an area with a strong ag presence or if the auction were in-person. This is because farmers are the primary buyers of farmland. In fact, they make up 71% of buyers. Farmland investors, mostly based in North America, account for the other 29% of buyers.
"I have never sold a farm to anyone with Chinese affiliated interests or Russian (interests)," Halderman said.
Instead, many foreign investors and buyers are from European countries, such as the Netherlands, who invest in farmland for dairies. Indiana is considering a bill that would bar foreign entities from buying farmland. The House passed the bill in February.
Regarding foreign ownership of Indiana farmland, Halderman said he thinks there is room to sell to foreign entities "as long as he's leasing the land to someone who is native to Indiana or—you've got to be kind of flexible here along the state lines—but somebody who's local, relatively speaking, to the property; they buy their inputs locally and they sell their outputs locally."
However, there are loopholes for foreign investors to buy farmland in Indiana, the biggest of which is their ability to create a U.S.-based LLC to buy.
Moving on, Halderman discussed the Purdue Ag Barometer. On a scale of 0-200, farmer sentiment across the U.S. is just above average at about 118-120, despite the rise in farmland value. Why? Halderman gives a few reasons, including that the barometer is based on a nationwide survey, not just statewide, future-based concerns and the inflation survey.
"Yes, inflation has been a factor in farmland values. Farmland is positively correlated with inflation," he said. "It's a 1:1 correlation."
Indiana farmers are experiencing an all-time high in farmland debt even as they are seeing all-time highs in farmland values. Farm credit accounts for about 51% of inflation-adjusted farmland debt.
Breaking it down, he compared farmland debt to other debts.
"What's the nature of real estate debt? It tends to be long term, fixed interest rates, lower interest rates," he said.
Today, farmers have more real estate debt than they did in the 1980s, but less equipment and operating lines, which tend to have higher interest rates.
"I think, structurally, this is a better debt structure for the long-term support of land values than what we saw in the 1980s," he said.
Asset values have also been high. In fact, the debt-to-equity ratio was 15.01 and the debt-to-asset ratio is 13.05. Total debt is a 3.4:1 ratio.
"When it goes above 5.5, that tends to be a warning sign that we're looking at trouble ahead," Halderman said.
Debt delinquencies are trending down and real farm capital expenditures are trending up, but are not too high, according to Halderman. Because of these things and the high farmland values, Halderman says farm income is more bullish, interest rates are on the border of neutral and bearish, and supply is on the border of neutral and bullish.
Incomes in 2007-13 experienced a "Golden Era" in which farm cash reserves built up, but from 2014-19, incomes declined and there was a cash drain. From 2020 to present, farm income was supported by government programs, which helped the ag sector reach a 2020 high. However, without government support, the 2020 high would have been much lower than the 2014-19 declines.
The recently released ag impact reports predict a decline in income values, but Halderman said it should not fall far enough to create drastic problems for farmers. Possible factors in the future include fertilizer prices and China's need for U.S. ag products. He pointed to the long-term child restrictions China had in place to regulate its population. Halderman said as these children from single-child families come of age and the older generations begin to die, China's population will fall, affecting their need for imported goods.
Halderman concluded with his take on where 2023 farmland values will go. Bearish arguments may include weather impacts and interest rate impacts among others, but Halderman describes himself as bullish.
"I'm bullish for these reasons: land values continue to appreciate, you've got profitable prices, you've got a lot of cash in liquidity, low amount of debt to assets, moderate supply of farms for sale, fuel supply, biofuels—they've kind of renewed the RFS, EPA did last fall, and they were steady—, and you've got the renewable diesel in the future," he said.
