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Many things have changed in the farm economy in recent months. Interest rates increased, inflation seems to be getting under control and farm income reached a record high in 2022, though it is expected to decrease in 2023.
How will these factors affect farmland values in 2023?
The FBN Data Science team regularly builds data-driven models to forecast future farmland values. While they don’t necessarily guarantee a specific outcome, these models help us:
Identify the key drivers that determine farmland values
Understand where those key drivers stand now
Predict how these key drivers may affect future outcomes
After testing multiple approaches, our team identified two main variables that correlate well with farmland values; when combined, the correlation is even stronger.
These two key drivers are Aggregate Farmer Savings and the Real Mortgage Rate.
Note: Red lines show the 2023 predictions for both variables. All data reflects Illinois specifically. Charts provided for illustrative purposes only.
The analysis below is developed using data from the state of Illinois, one of the most functional and developed farmland markets in the country, and it is used as a proxy for the broader agricultural sector.
The Aggregate Farmer Savings figure is calculated using net cash income data from the USDA Economic Research Service (USDA-ERS). This figure captures the effect of farmers saving their income and using it to purchase land in cash or as a down payment for a loan.
Logically, if net cash income is higher, then savings are higher — this creates pressure on farmland, raising the value of property assets.
Rather than using just the previous year of net cash income, we determined the best predictor was to use the change in cumulative net income over several years; we refer to this as "farmers savings change."
This variable has a correlation with farmland value change of 0.7, which is high in statistical terms. Net cash farm income has been high in the last two years, and it is predicted that the lag effect of this will manifest in 2023 farmland values.
Using Illinois as an example, farmers’ savings changed by 13.1% in 2022, which translates into a 14.8% expected increase in farmland values for 2023.
The "Real Mortgage Rate" is calculated by subtracting the inflation rate from the actual 30-year mortgage rate.
For the 2023 forecast, we consider that the 30-year mortgage rate in June 2023 will be 6.7% , while annual inflation will be 5.3%. This means that the real mortgage rate will be 1.4%. This reading is higher than last year’s negative calculation, but it is still low in historical terms.
The Real Mortgage Rate has a correlation with farmland values of -0.57. This negative number indicates that when the real mortgage rates increase, farmland values decrease, and vice versa.
Using Illinois as an example, the Real Mortgage Rate calculation for the 2023 forecast translates into an expected increase in farmland values of 7.2% this year.
Low mortgage rates encourage two main behaviors:
Increased borrowing and investing (since the cost of money is lower).
Increased interest in assets like stock and real estate, fueled by low rates for alternative investments, like bank CDs or bonds.
Relatedly, low economic interest rates increase the present value of future cash flows, which is a valuation methodology used for farmland and other assets. As a result, this increases the price that an investor is willing to pay for farmland.
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Putting it all together, we have these two drivers that represent different behaviors.
Key Driver 1, Aggregate Farmer Savings, reflects savings that usually are used to buy land or equipment, and it has a lag effect, from one year into the other. Last year it increased, which appears to add pressure to this year's farmland values.
Key Driver 2, the Real Mortgage Rate, reflects the borrowing incentives and the alternative expected returns in the economy. This variable is lower than last year, but it still indicates a likely positive increase in farmland values.
With these calculations in mind, the best predictor for the Illinois land value changes is the average of these two predictions, with a combined correlation of 0.7. This results in an expected increase in Illinois farmland values of 11% for 2023.
As noted above, this is a prediction based on historical data. There could be unexpected events that change the normal behavior seen in the sector and the economy. We recommend investors consider their own expectations when analyzing farmland investments.
To see recent land sale trends in various states, check out our latest state farmland valuation series:
Interested in acting now to expand your ag operation? FBN Finance has a wide range of available financing options and a team with deep ag finance expertise standing by and ready to help you take the next step. Connect with an FBN financial advisor to discuss land financing options today by clicking here, completing the short form below, or calling 866-619-3080.
Farmland values are “land and buildings values” from the “June Area survey”. USDA Quickstats (1960-2022).
Nominal mortgage rate is from the Saint Louis Federal Reserve data center (1960-2022).
Inflation rate is calculated based on the Consumer Price Index (CPI) from the Saint Louis Federal Reserve data center (1960-2023).
Mortgage rates are from the 30-Year Mortgage Rate from the Saint Louis Federal Reserve data center (1960-2023).
Net farm income used for calculating farmers savings refers to the farm sector as a whole. It is calculated by determining the gross value of goods and services generated by farm assets and subtracting the expenses incurred during the year. We calculated the mean of the previous three years' net-income per acre. Obtained from ERS https://www.ers.usda.gov/dataproducts/farm-income-and-wealthstatistics/
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