How Do Interest Rates and Inflation Affect Farmland Values?

German Mandrini

Jan 12, 2023

Farm land values have been increasing over the last three years, with a record increase in values in 2021. Most farm land sales occur after harvest and going into the winter. 

For the 2022 sales season, we do not see any significant effect of higher interest rates on new sales, and land values are still strong. This is because farmers have had a better year than expected, with high prices for commodity crops (corn 10.2% and soybeans +15.3% between December 2021 and December 2022) and sound balance sheets. These two factors increase demand for farmland.

In addition, the real mortgage rate (mortgage rate minus inflation) is one of the best predictors of farm land value change. Currently, the real mortgage rate is still negative but approaching zero (6.33% mortgage rate, and 7.1% inflation rate in November 2022 ), which indicates positive increases in farm land values of +8.8%. 

[READ: December Fed Meeting Recap: Still A Good Time to Secure Short Term Financing]

We see stability so far, but that could change. The future ahead depends on the interaction of two main factors: 

  • Interest Rates: If the Fed successfully controls inflation and interest rates peak next year and start to decrease, that would be a positive sign for farm land values. If the Fed needs to push more with their tightening policies and increase interest rates for an extended period, that would eventually reduce purchase power from farmers, leading to lower farm land values. 

  • Farm Profits: Fertilizer, chemical, and energy costs are expected to be higher next year. If commodity prices increase more next year, compensating for those higher costs, demand for farm land will likely stay strong. If commodity prices do not increase to compensate for those higher costs, farm profits will be lower, reducing the interest in farm land purchases and probably reducing farm land values. 

The balance between those two determinants gives the following four scenarios, with the respective outcome in farm land values:

Scenario

Fed successful, higher commodity prices

Fed successful, 

lower commodity prices

Fed keeps increasing rates, 

higher commodity prices

Fed keeps increasing rates, 

lower commodity prices

Cost of Capital

Lower

Lower

Higher

Higher

Farm profits

Strong

Weak

Strong

Weak

Farm land Values

Higher

Neutral

Neutral

Lower

The Time Might Be Right to Apply for a Land Loan

Even though rates are high, the market is predicting they will rise even higher. Now may still be a good time to purchase that ag land you have your eyes on. The FBN Finance team is ready to support you as you finance your operational expansion. Click here to learn more about land loans and other financial services from FBN Finance. 


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The farm land valuation has been prepared solely for informational purposes. The information contained herein has been prepared to assist individuals in making their own evaluation and does not purport to be all-inclusive or to contain all of the information a prospective land purchaser may desire. In all cases, interested parties should conduct their own investigation and analysis on this information. FBN makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) regarding information contained in, or for any omissions from, this information or any other written or oral communications transmitted to the recipient in the course of its evaluation. This Information includes certain statements and estimates provided by FBN with respect to the projected future performance. Such statements, estimates and projections reflect various assumptions by management concerning possible anticipated results, which assumptions may or may not be correct. No representations are made as to the accuracy of such statements, estimates or projections. Prospective land buyers will be expected to have conducted their own due diligence investigation regarding these and all other matters. All land purchases involve risk and may result in loss.

Terms and conditions apply. Land financing offered by FBN Finance, LLC, provided in connection with Farmer Mac and our underwriting partners, and is available only where FBN Finance, LLC is licensed. To qualify, a borrower must be a member of Farmer’s Business Network, Inc., and meet the underwriting requirements of FBN Finance, LLC and its lending partners. All credit is subject to approval and underwriting. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify.

German Mandrini

Jan 12, 2023

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