We’ve noted before that, according to USDA data, the United States lost an average of 4.3 acres of agricultural land every minute of every day from 2000 to 2022. For perspective, that’s an area larger than three football fields every 60 seconds.
Meanwhile, food demand continued to grow as population and global wealth both increased. And the trend shows no signs of stopping, with the world projected to add 500 million people by 2030, based on United Nations’ analysis.
This unique supply-and-demand dynamic is one reason why the farmland market behaves differently than much of commercial real estate. Instead of peaks and valleys of traditional real estate values that mark economic changes, farmland tends to experience peaks and plateaus.
That is, farmland often appreciates at a high rate when the farm economy is strong, but it doesn’t necessarily retreat when economic times return to normal or when unique challenges emerge.
The volume of farmland transactions may decrease during economic downturns since most sellers want to list properties in the best possible environments. But fewer transactions do not necessarily mean reduced asset values.
In fact, farmland often gains value in tough years.
This phenomenon was on full display when the USDA released its annual report on farmland values in August. That report showed an increase of 7.4% in U.S. farmland values over the past year.
Considering the fact that 2023 has encountered higher interest rates and drought conditions in much of the Heartland, this increase – albeit down from 2022’s blistering 12.4% annual appreciation rate – speaks to the health of the asset class.
In addition to supply and demand, farmland’s value appreciation strength is further helped by farmer incomes. Green Street Advisory Group commented on the topic in its 2021 look at farmland investing.
“Farmers’ income is a function of both price and productivity. Steady and growing yields from best-in-class U.S. farming operations have helped balance the fluctuation in commodity prices,” they noted. Plus, “the U.S. government deems the agricultural sector so essential to a functioning society that it provides support mechanisms to farmers, which provides another layer of income stability.”
As a result, there’s some insulation in difficult times.
Michael Lauher, a member of the Illinois Society of Professional Farm Manager and Rural Appraisers, recently wrote an article on this very topic for Farm Progress, looking at the historical impact of droughts on Illinois farmland prices.
“Except for 1931, for each year following a drought, Illinois land values increased,” he wrote.
Droughts have little downward impact on farmland because of crop insurance, government aid, and improved crop genetics, Lauher concluded.
Chart out U.S. agricultural land values since 1970 and cropland prices since 1997 (when the USDA began reporting data), and you can see this same phenomenon on a national scale.
Farmland values didn’t dip after Midwest droughts in 1988, 2005, and 2012. Nor did they fall off a cliff during the economic recessions from 1973-75, 1990-91, 2001, 2008-09, or 2020.
Yes, farmland prices did decline during the farm crisis of the ‘80s – a unique time when many agricultural businesses went bankrupt. But even then, it bounced back after a short time and continued appreciating.
Smooth it all out and you see an average annual appreciation of nearly 6% since 1970.
Are we entering another period of plateau, or will the peak continue? Only time will tell, but regardless of the outcome, we remain bullish on farmland – an investment class with a history of stability anchored in its finite supply and growing demand.