US farmland escapes housing slump as prices soar to record highs

Farmland prices in the Midwest, the nation’s breadbasket, rose 20% year over year in the third quarter alone to offset a downturn in the housing market, according to data from the Federal Reserve Bank of Chicago and the National Association of Realtors. That was the 11th straight quarter of earnings, the longest streak since 2014.

Jim Schultz, who runs Open Prairie, a private equity investment firm in central Illinois, believes farmland prices could double in the next 10 years. That’s after the 13,000 acres he bought for $750 an acre between 1987 and 1992 are now worth 16 times that.

“I think we’re at the beginning of a decade-long trend,” said Schultz, who says he has no interest in selling. “We’re in a very good position.”

US growers are making more money as Russia’s invasion of Ukraine chokes off supplies from a major producer of everything from corn to wheat to sunflower oil. Higher prices have pushed farmers’ profits to nearly $161 billion this year, a 14% increase from 2021, the US Department of Agriculture estimates.

broadband expansion

More demand for farmland coincides with pandemic-related population shifts. The number of people living in counties outside the metro area rose 0.3% in the 12 months to July 2021, the first time rural population growth has outpaced urban areas since the mid-1990s, it said USDA.

Tom Halverson, chief executive officer of CoBank, a co-operative lender serving rural America, said the rollout of broadband and the ability to work from home were driving that change.

“The reality is that rural America is growing in population for the first time in several decades,” he said on Bloomberg TV this month. “It is our hope and expectation that this will be structural in some way, but it will be unevenly distributed across the country.”

Farmland has also become more attractive as owners try to make money from the clean energy transition. According to BloombergNEF, demand for renewable diesel made from vegetable oils but with identical chemical properties to petroleum-based fuel is expected to triple over the next five years.

Farmers also have space for solar panels and wind turbines, with the number of farms with photovoltaic arrays doubling in the five years to 2017, according to the USDA’s most recent Agricultural Census. Still, arable land with renewable energy accounted for only 6.5% of the total area, underscoring untapped potential.

Producers can now also benefit from carbon capture, with the price Indigo Ag is paying farmers for doubling carbon over the past two years.

US recession

Of course, rising interest rates and a potential US recession could still hit the farmland market next year. Prime land prices in Illinois could drop between 2% and 5% over the next year, according to Luke Worrell, a farmland broker in the city of Jacksonville, Illinois.

“Between falling yields and higher interest rates, meet your two biggest farmland buyers. It’s a double whammy,” Worrell said in an interview. “We’ve had a wild ride, but we’d be naïve to think it’s going to last forever. We have to be prepared for a little softening.”

Matthew Fitzgerald, who grows organic corn and soybeans with his family in McLeod County, Minnesota, said the biggest challenge young farmers face is the cost of land. He used a USDA program to expand his family’s 200 acres to about 2,500 acres and works with agricultural land investment platform AcreTrader, which buys land that he then manages and co-invests in.

“With farmland prices at this level, figuring out how to stay competitive and how to acquire land is a total mystery,” Fitzgerald, 31, said over the phone. “Commodity farming in the Midwest is very much like the mafia, you have to know someone or have a lot of money.”

real fortune

In the longer term, a growing world population coupled with a changing climate is making productive Midwestern land an integral part of global food production.

The interest of external investors is also increasing. Farmland is considered an excellent hedge against inflation, as the commodities produced there tend to appreciate in value when overall prices rise.

“Land is a real asset,” University of Illinois professor Gary Schnitkey said at a conference in Champaign. “Would you like to own a piece of dirt or cryptocurrency? It’s a good way to diversify your wealth pool.”

Bloomberg