With the U.S. in turmoil over COVID-19-related economic distress and political unrest, logic and analytics would likely point to uncertainty with regard to farmland values. However, farmland values have been resilient in the face of the pandemic, and most tenants are honoring their lease commitments.
Fortunately, many farmers locked in their spring financing commitments prior to the widespread lockdowns and supply chain disruptions. With $16 billion in direct support coming from the USDA through the Market Facilitation Program and other aid programs to farmers and ranchers, the federal government is continuing to back growers and food producers.
One of the significant positives from the first couple of months of 2020 was the Phase 1 trade agreement with China. The global impact of COVID-19 jeopardized the first phase of commitments. China is purchasing US agricultural commodities but will need to greatly increase them to reach their commitments. It is likely that the ending date for the commitments will push out later due to COVID-19.
Treasury bond yield trends for the first part of 2020
Farmers seeking to recapitalize their debt or taking on new debt missed a window of opportunity as 30-year Treasury bonds lost favor with investors, causing rates to climb as of early June 2020. One reason for the falling out is that the federal government had to borrow heavily to fund various COVID-19-related stimulus programs.
In contrast, short-term yields remain relatively low, and market observers believe that the difference between short- and long-term yields will continue to widen. The U.S. government is beginning to rein in commitments to additional emergency support programs. In addition, the Fed is looking to provide investors with a measure of certainty for maintaining short-term rates and avoiding an inverted yield curve. An inverted curve is a situation in which short-term rates exceed medium-term rates and often forecast a recession. The US entered a recession back in March, so this indicator seems nominal at this point.
Interest rates and farmland values moving into the second half of 2020
While mortgage rates and U.S. Treasury yields do not move in lockstep, the latter is generally a good proxy for commercial and residential loans. With a view of the yield curve moving forward, lenders may react by pricing acquisition loans somewhat higher than shorter-term loans for farm operations. Higher rates often, but not always, cause farmland values to decline.
In recent years, however, constrained supply and continued demand for quality farmland kept farmland values stable and increasing in many U.S. regions. More than ever, the nation is placing a premium on stable food supply, along with the supply chains that get food to commercial and residential consumers. With farmers still challenged by the residual impact of the trade conflict with China and the perennial concerns about climate, it is reasonable to expect continued government support for the industry.
While lower interest rates tend to positively influence farmland values, the impact of rates is only one of a complex set of influential factors. Profitability, productivity, the overall performance of the economy and the availability of alternative investments all play a part, as well as trade and unanticipated shocks to the economy like the current pandemic.
Halderman Real Estate and Farm Management have been advising farmers and farmland investors for several generations. We watch interest rate trends closely, and we welcome your inquiries about the best timing for your next expansion, acquisition or sale.