“Historically, after land values on poorer quality acres goes up it will level out and then take a downturn that goes faster and further than the higher quality land,” Karst explained. “We are analyzing enough data points to determine trends more than predicting future land prices. I’m looking forward to the next eight months to see what happens to land values across the board.”
The data Karst first started collecting in 2013, encompasses tillable land that has no improvements on it such as grain bins or outbuildings and would not be viable properties for any type of development other than production agriculture. This gives Karst a clear view of what farm ground is truly worth without any outside influences.
“Since August 15, Halderman sold dozens of farms that were 90 percent or more tillable acres,” Karst said of chart 1 below, which is a summary of that data for 2023. “Looking at this data, we see that the last five sales were over $90 per WAPI point and there have been 21 of those this year. That indicates that top quality farmland is not declining, it’s the lower quality, which we call hassle farms, because they’re a hassle to farm.”
All the way through August, Karst was confidently calling the market steady to up with a 5 percent increase. Now, it may be down 10 percent or more on the poorer quality farms.
At the same time, interest rates continue to be a topic of concern.
“For the last 20 years, we’ve had interest rates below the rate of inflation,” he said. “That’s an anomaly historically. A lot of the younger farmers haven’t experience anything except for low interest because that’s all they’ve dealt with their entire career.”
Karst put it all in perspective: “Based on historical values, we are about average on interest rates. Forty years ago, in the 1980s, interest rates for farmland were somewhere between 16 and 19 percent. Back in 1983, farmers were spending around 35 cents of every dollar on interest. In 2022, that number was 12. I would guess we’re at 15 or 16 cents on the dollar today.”
As stated in the past, it would be almost impossible to replicate the tsunami of the 1980’s that devastated the agricultural industry. There are similarities to be sure, but still no reason to panic about land values or interest rates.
Why is this happening and what does it mean?
“High prices cure high prices and a good example of that was when corn hit seven and eight dollars per bushel,” Karst said. “The US was the commanding leader in corn production when it hit that extremely high price and soon everyone around the world was growing more corn. Now, South America is the leader in that crop and we don’t have seven dollar corn anymore.”
Some of Karst’s predictions about the market are based on the fact that those trends begin out west and move east. This year is no different as Missouri recently set a national record when a farm sold for $34,000 per acre. Even though this was a record, the selling broker says land values in general are down 10 percent. Another broker in Iowa is also calling land values down 5 to 10 percent.
“You could easily say that land prices at $18, $19, $20,000 per acre are all too high,” Karst added. “Land values are not in a free fall; but people may not be willing to buy land at these prices anymore.”
In a study conducted by Iowa State University about interest rates in 2022, it was concluded that agriculture would not feel the effects of higher interest rates until almost a year after large sums of debt were acquired. Many of those first mortgage payments are coming due right about now.
“Our sales indicate that there are fewer investors in the market now compared to a year ago,” Karst said. “Last year in September, investors made up 25 percent of our buyer audience. This year that number dropped to 15 percent. While land is always a good investment, those investors have alternative safe investments such as a certificate of deposit.”
Even if the thought of land values declining seems like a hard way to start out the final quarter of the year, everyone knew the record prices couldn’t last forever. And it’s not all bad news.
“Even adjusting for inflation, we are selling at the highest prices in history,” Karst said. “The last time this happened was in 2013. Even if land values decline by 25 percent, they’ll still be higher than they were in 2020. What does that mean for you? If you’ve been thinking about selling, now is the time. We may have reached a peak in land value and are seeing the early signs of a decline that tell us they aren’t going any higher.” Call your local Halderman representative or Pat at 800-424-2324 if you have questions about your farm.