DECATUR, Ill. — After “the craziness of 2021 and 2022″ the farmland market appears to be catching its breath with stable to slight declines for the first half of 2023.
The Illinois Society of Professional Farm Managers and Rural Appraisers released the results of its mid-year land values survey during the Farm Progress Show Aug. 30.
According to 65 ISPFMRA members who responded, prices paid for excellent and good quality farmland have been stable in the first six months of 2023, while average and fair quality farmland saw a slight decline of 2%.
Excellent quality farmland averages over 220 bushels of corn per acre in a normal year with a soil productivity index of 133 or higher. Good quality farmland averages between 200 and 220 bushels per acre, with a soil productivity index of 117 to 132.
Average quality farmland averages between 180 and 200 bushels per acre with a soil productivity index of 100 to 116 and no irrigation. Fair quality farmland averages below 180 bushels per acre with a soil productivity index under 100.
“The market has kind of settled in and most expect us to continue that trend through the rest of this year.”— Luke Worrell, owner, Worrell Land Services
The survey was conducted by Gary Schnitkey, University of Illinois professor of farm management and Soybean Industry Chair in Agricultural Strategy and ISPFMRA secretary/treasurer.
Joining Schnitkey in the presentation was Luke Worrell, Worrell Land Services, Jacksonville, and 2024 Land Values Conference chair.
“It’s important for context and to quickly review the craziness of 2021 and 2022. We’re coming off an unprecedented stretch where we saw farmland values in some instances rise up 40% to 50% in some cases,” Worrell said.
“All classifications of land saw some really enormous rise in value over the course of 2021 and 2022. So, it was going to be real interesting to see how things play out here.
“If I could boil down to one sound bite, I would probably say that the market appears to be catching its breath. For the first time in a long time doing these, I don’t have a crazy figure to throw out.
“So, from a values perspective, not much has changed since the calendar rolled into 2023. I think some people expected us to have a little bit of a drawback, nothing severe, but a little bit of a drawback, and we just have just have not seen that yet.”
The survey also included several other questions.
Land Values Outlook
Of those responding to the survey, 44% expect prices to remain the same for the balance of the year while 36% expect prices to drop between 1% and 3%.
Only 13% of those responding expected values to increase and then only between 1% and 3%. No respondent expected prices to go up more than 3% through the remainder of 2023.
“So, a vast majority of people are expected prices to kind of settle in to where they are now and the market will continue to catch its breath to a certain degree,” Worrell noted.
“The stability of prices paid for the land will likely be short-lived, according to the respondents with a full 53% expecting land values to drop over the next two years while 38% are optimistic that prices will remain static, and 7% expects land values to be higher in two years than they are currently.”
Two-thirds of all farmland sales were for settling estates in the first half of the year. Farmers themselves selling the farmland accounted for 9%, local investors selling was 8%, non-local investors selling were 7% and institutions, 5%.
“Another thing that I feel is always interesting is who’s buying farmland. That’s a question we get a lot, and the answer is locals. We don’t always see those sales in the headlines,” Worrell said.
“Typically, big names and institutional buyers are the ones you read about, but our studies show 65% of all buyers are local farmers and 16% are local investors. So, we’re looking at over 80% of all buyers in the first half of 2023 were locals.”
Nonlocal investors accounted for 10% of the buyers, institutions were 7% and all other entities was 2%.
“It really is the locals who are still driving and feeding this value we see in the market,” Worrell added.
“We also asked of all respondents, did they play some sort of role in a transaction involving an institutional investor and 37% had help facilitate or play some role in at least one transaction that involved an institutional investor.
“Only 7% said that they had participated in a transaction that involved a foreign investor of some kind.”
The survey asked what the respondent’s expectations were for interest rates going forward.
Thirty-three percent expected stable interest rates, 30% expected an increase of 0.50%, and 28% expected an increase of 0.25%. Only 5% thought it would continue to go up by more than 1%, and 4% expected rates to climb in some fashion.
For the second straight year, variable cash rent or flex leases were the most popular arrangement among professionally managed farms.
“We’ve seen that grow in popularity at the expense of traditional cash rents, and 32% of the respondents indicated their farms are flex leases, 27% were traditional share rent, 26% were cash rent leases. So, flex leases continue to be kind of the new kid on the block in that regard,” Worrell said.
He explained that for variable cash rents, the most common cash rent has a base cash rent regardless of prices, yields, or incomes. A bonus payment enters the calculation based on revenue.
The survey found 93% of variable cash rents have a base rent that is paid regardless of prices, yields, or incomes; 77% have a payment if revenue exceeds specified levels; 13% have a payment based on revenue where the revenue begins at $0; 26% have a payment based on price; 23% have a payment based on yield; and 7% have costs of production enter the calculations of rent.
Schnitkey noted that when yields enter rent calculations, farm yields are used in 96% of the cases. County yields are used in the other cases.
When price enters into rent calculations, multiple prices at delivery points are the most common method for arriving at the price.
Here are other related findings:
• 41% of leases use multiple prices at a local delivery point.
• 52% use futures prices.
• 7% use actual marketing.
• Crop insurance payments and/or government payments are used in calculating rent payments in 23% of the leases.
• When gross revenue is used to calculate a bonus, the average percentage is 34% for corn and 39% for soybeans.
The survey found 34% of the farm managers responding have at least one farm with an arrangement with a wind company.
In addition, 31% of farm managers have at least one farm with an agreement with a solar company.
“In conclusion, this admittedly probably wasn’t the crazy, eye-catching numbers that you’ve grown accustomed to over the last couple of years, but I think we can make an easy argument that that might be healthy that we aren’t up here talking about another 20% increase in values and rents,” Worrell said.
“It’s been an eventful first half of the year, but not in regards to the numbers we’re seeing. The market has kind of settled in and most expect us to continue that trend through the rest of this year.”