Amidst rising interest rates and extreme weather events, farmland values in the United States have defied the odds and reached record levels this year, showcasing the enduring strength of this investment class.
A recent report released by the USDA revealed that the value of U.S. farm real estate, encompassing both land and buildings on farms, experienced a remarkable increase of 7.4% over the past year. The data presented in the August 2023 Land Values report also indicated an impressive growth of 8.1% in cropland values since 2022.
These findings are separate; multiple sources within the agricultural and economic sectors support them. For instance, the Federal Reserve Bank of Chicago echoed similar sentiments in its August 2023 AgLetter. This report highlighted a 9% rise in farmland values across key farming regions in the bank’s district, encompassing significant agricultural areas in states such as Illinois, Indiana, Iowa, Michigan, and Wisconsin.
Moreover, the Federal Reserve Bank of Kansas City, covering states like Colorado, Kansas, Nebraska, and Oklahoma, as well as parts of Missouri and New Mexico, released a paper underscoring the resilience of farmland values. Despite an evolving farm economy and the backdrop of higher interest rates, the paper highlighted an average increase of about 7% in the value of nonirrigated cropland compared to the previous year.
Luca Fabbri, President and CEO of Farmland Partners Inc. (NYSE: FPI), a company deeply involved in farmland investments, articulated the significance of these findings. He emphasized that appreciation is a fundamental pillar of farmland investment returns. Fabbri noted that one of the unique characteristics of farmland is its ability to appreciate steadily, exhibiting consistent growth even in the face of economic uncertainties.
Fabbri pointed out that farmland values do not exhibit the sharp peaks and valleys typically associated with economic fluctuations. Instead, they demonstrate a pattern of “peaks and plateaus,” characterized by appreciating at a robust rate during favorable times and maintaining stability during challenging periods. Fabbri attributed this phenomenon to the limited farmland supply, which drives its value up over time.
Underpinning the sustained value growth are factors like global population growth, increasing demand for food, and innovations that boost agricultural yields. As populations expand, the need for agricultural products rises, inevitably driving the demand for fertile land.
Fabbri further stated that farmland values have historically grown by approximately 6% annually when the peaks and plateaus are smoothed out. Recent transactions by Farmland Partners Inc. further underscore the tangible benefits of farmland appreciation, offering real-world examples of the investment’s potential.
It is important to note that these soaring farmland values are amidst challenges, including rising interest rates and extreme weather events fueled by climate change. The fact that farmland values are still climbing underscores their resilience and attractiveness as an investment option.
The data provided by these reports supports the notion that farmland is not merely a passive investment but rather a dynamic and evolving asset class. As the global population grows and the demand for food surges, farmland investment remains a stable and potentially rewarding endeavor.
In a time of economic uncertainty and climate-related challenges, the consistent and substantial appreciation of farmland values presents a bright spot in the investment landscape. The findings from the USDA, Federal Reserve Bank of Chicago, and Federal Reserve Bank of Kansas City all converge to highlight the enduring strength and potential of farmland as an investment class. As the world’s population continues to expand and the need for agricultural products intensifies, farmland investments could continue providing stability and growth for investors.