Farmland to Normalize in 2023 as Fed Raises Rates

Jason Burbage, President, National Land Realty

The Federal Reserve has increased interest rates in June, July, September, and November. This has slowed real estate markets as the borrowing rate has reached 4%. Buyers now have significant additions to cost, which means they are seeking lower prices overall. Sellers are now adjusting to this market change, and it will take time for those two sides to come together.

Land Tied to Food Production Hitting All-Time Highs

Land markets are impacted by these changes, especially for land that requires financing. However, the land market tends to revolve around more cash and instruments like 1031 exchanges, so it has not seen the whiplash we see in residential markets. We still see this when it comes to land tied to food production. Farmland with ready access to water is at an all-time high, and in several Midwest states, it is still inching upward. Land is real estate, but not all real estate behaves the same.

Food production has faced challenges in terms of natural gas and diesel supply, fertilizer prices, and additives such as nitrogen continue to be expensive and have experienced supply shortages. However, the good part here is that commodity prices are also high, and most sections of agriculture not affected by water shortage are seeing good returns in 2022. This combination of external factors has strengthened the value of the land on which food is grown.

Western Land Markets Are Normalizing

As we move into 2023, we see increased conversation revolving around economic downturns and market corrections. There is a lot of fear-based language in markets, but that has historically been a good thing for the land industry. Many investors push money into land to hedge against market volatility. Rural land tends to be a protective investment against this kind of market volatility.

One place where we see a bit more market correction is out West, where demand over the past two years has been extremely high. This high demand drove land values to some of their highest levels on record. We look at this as a proper market correction. We hear “decline,” but that’s not how we see it. We are witnessing a market slowly moving back to a more realistic and sustainable level than we have seen over the past two years. So, the Western markets are not so much correcting as they are normalizing. Keep in mind, though, that areas experiencing water crises might see a bit more price fluctuation than other lands.

This is a blanket statement, and there are always exceptions, but for the past two years, we have seen land selling merely for the value of land. There were a lot of purchases made by individuals who wanted a more rural lifestyle and first-time farmers. We are seeing more emphasis on what is actually on that land, whether hunting tracts, farmland with plentiful crops, or ranches with plenty of pasture and water. We are seeing more experienced buyers who plan on working the land themselves, and they know the value of it.