Trends in farm real estate can change rapidly, and having an expert guide you through some of the variables that affect farm prices is important if you are in the market as an investor or a seller.
Fundamentals like supply obviously impact prices, but topics that are currently top of mind in the ag sector like tariffs and weather can also affect prices. Under the current administration, tariffs have been imposed on foreign agricultural products but also on non-farm products. Retaliatory actions by other countries have had a big impact on farm operations. Likewise, the poor planting weather farmers have experienced this spring across the Midwest has had an impact on farms.
Sam Clark of Halderman Real Estate and Farm Management has provided valuation expertise for many farm transactions, and we recently discussed what factors are involved in farmland prices.
What are some of the key pricing elements a buyer or seller should look at when assessing the farmland market?
There are three main drivers for the price of farmland. First are interest rates. Many people are aware that they have been rising, and this, of course, negatively affects the cost of debt for both land and equipment.
The second factor would be the supply of farmland for sale. The supply of farms relates not just to the bigger picture for a region or a state but also within smaller communities and areas. The supply of available farms has been relatively low and that has helped keep prices up.
Finally, farm profitability has a big impact on farm prices. The deterioration of grain prices has provided downward pressure on farm prices. Crop yields were very good in most areas last year, and this helped keep prices stable through last winter.
These factors are interrelated, and the central Indiana market, for example, has been moving sideways the last year and a half. It will be interesting to watch how some of the negative potential impacts, like continuing tariffs and probable lower yields from planting delays, impact the market moving into the fall.
How does overall farm financial health impact farm prices?
It absolutely has a major impact. In the years prior to 2014, farms were very profitable after several years of robust production and high grain prices. Likewise, we were seeing very strong upward pricing trends in farmland. Since that time, farm profitability has declined, and farmland prices did as well. Now, with the Chinese tariffs and unstable foreign trade, there is continuing downward pressure on grain prices. The weather delays that have impacted planting have been a positive factor for grain prices in recent weeks. However, farmers are likely looking at fewer bushels to sell this fall, so farm profitability and financial health could still feel pressure. Combined these factors could put downward pressure on what has been a relatively stable land market.
How does Halderman keep up with market trends?
We sell a lot of farms and perform a good deal of farm appraisals. Thus, we maintain very detailed databases that give us local market intelligence. We can assess the potential for a farm based on the data that we have compiled and our experience and expertise in the marketplace.
One thing to note is that there can be very significant intra-market price variation. Soil types, farm fertility, topography and other factors can vary enormously within a very confined region. Also, some communities have seen a lot of recent sales with more land changing hands in certain areas than in others. In areas with more land sales, available cash has become more limited.
In parts of a county where few properties have changed hands, we can expect the demand for farmland to be higher. This drives local farmland prices.
Is there anything else you would like to add?
One clear trend is that there has been a flight to quality. Buyers were not as particular during boom times, but as profitability declined and cash became less abundant, things like high quality soils, desirable layouts, and good drainage, start to matter a lot.