COLUMBIA, Mo. — Many factors can drive the demand for farmland, but University of Missouri Extension ag economist Ray Massey says available cash seems to be the primary driver, even more than economic conditions any one year.
“People tend to bid off of how much money is in the bank rather than if they’re going to make a profit on it this year,” he says.
In addition to cash on hand, several other factors can impact demand for land, including crop prices, how a piece of land fits with an operation, and even how land compares as an investment as opposed to other investing opportunities, such as the stock market.
Massey organizes MU’s annual land values survey and is in regular contact with ag lenders and land appraisers. He says people are still eager to buy land.
“In my conversations with bankers and appraisers, we are not seeing any decrease in land purchasing,” he says.
Using projections from the USDA and MU’s Food and Agricultural Policy Research Institute (FAPRI), which looks at nationwide conditions, Massey says he expects another profitable year for farmers, albeit not the margins many farmers saw in 2022 if they avoided drought conditions.
“My budgets are still showing people are going to make a profit in 2023,” he says. “…They should still be making money.”
Lance Albin, president of UMB Bank’s agribusiness division, says relatively strong crop prices as opposed to three or four years ago have kept farmers in an expansion mood, despite the higher land costs.
“It changes the entire dynamic,” he says. “They’re not backing away from opportunities to expand.”
University of Illinois ag economist and professor Bruce Sherrick says ag land is an attractive investment for farmers and non-farmers because it has a long track record of strong rates of return, and is relatively stable in value compared to other investment options, such as the stock market.
“That has triggered and continued an interest in farmland as an investment,” he says. “…The long-term return of agriculture over inflation has always been positive. I can find no sector like that. That’s one reason it’s attractive to investors and pension funds.”
Previous years of profitability for many farmers because of higher crop prices and government payments have given them cash to put toward land purchases, and Massey says land values seem to be 10 to 20% higher than a year ago. He says he talked with a land appraiser who said every time he thinks farmland values have reached their peak, he hears of land that has sold for a little more.
Massey says many land purchases are beyond its ability to pay for itself, but farmers are still willing to buy if they have the money and can use other pieces of land to make the cash flow work.
Thinking back to a recent conversation with land-buying farmers, he said, “They acknowledged the value they’re having to pay for land, they could not cash flow it. They are buying land as an investment and they are using other assets to bring it along.”
With higher interest rates and higher land values, Massey says bankers are especially mindful of the bottom line.
“They are looking at cash flow a little more tightly,” he says.
Massey says even if some people are paying $8,000 an acre for farmland, the bank might value it at $6,000 and loan according to that.
“They’re saying that extra $2,000, you’re going to have to take that out of savings,” he says.
He says many farmers are sitting on money to make that happen, although he adds that drought conditions severely reduced yields in some areas last year, so not everyone is in the same situation.
“Boone County, we didn’t get near as good of yields as even 50 miles north,” Massey says.
As for non-farmer investors looking to buy land due to a weak stock market over the last year-plus, Massey says there are some examples of this, although it is not extremely common, relatively speaking.
“I think it would be on the margins,” he says.
Massey says investing in farmland usually depends on a person’s specific situation.
“On certain pieces of land, and certain people, they would look at land,” he says.
Massey says the average everyday person would not be likely to have enough money in their investment portfolio to buy a 300-acre farm outright, but smaller pieces of land are attractive, especially those with recreation potential that the buyers can enjoy hunting and other activities on.
“Recreational land is actually increasing (in value) at a faster rate than productive land,” Massey says.
Even on small parcels of land, however, Massey says would-be buyers face competition from neighboring farmers looking to buy the land.
Sherrick says the low turnover of farmland also supports its value and keeps competition for land, because there are limited opportunities to buy. He says farmland remains a valued asset, both for farmers looking to expand and as an investment opportunity.
“What asset would you rather own?” he says.