December 2023

Outlook for land values in 2024 and beyond

The slowing pace of the growth in Iowa farmland values is not really a surprise for some – in November 2022, over 30% of the 2022 Iowa State survey respondents thought land values in their territory would either remain the same or modestly increase in 2023. The small increase from the 2023 Iowa State University Land Value Survey of 3.7% falls within that expectation. On the other end of the spectrum, nearly 70% of the respondents believe that land values are higher than they should be and about 50% expect a decline in the next year. This is explained by the downward pressures by rising interest rates, lower commodity prices, and higher input costs.

TFigure 1. Average value per acre of Iowa farmland.he estimated $11,835 per acre statewide average for all qualities of land in Iowa represents a 3.7% increase in nominal land values from November 2022 (Figure 1). This modest increase, following the dramatic 17% surge last year, means that Iowa farmland values, still at an all-time high since Iowa State started tracking the land value information in the 1940s, have started to cool off. After adjusting for inflation, the overall inflation-adjusted land values rose only 0.5%, and the inflation-adjusted land values fell in 45 counties. Despite the slowing pace, there is a variation in the change and inflation-adjusted land values in 42 out of 99 counties in Iowa are still at an all-time high.

Many of the factors behind the large surge in values last year continue to support this increase at the beginning of the year—interest rates were lower through the first half of the year, commodity prices were still elevated as weather and geopolitical uncertainty created crop production concerns, crop yields once again were a positive surprise despite the weather challenges throughout the growing season, cash and credit availability has remained ample and allowed farmers to stay aggressive in the land market, and investor demand grew stronger nudged by inflation concerns and lack of alternative investment options.

According to USDA Economic Research Service’s December 2023 farm income forecast, US net farm income is forecast to decrease $31.8 billion (17.4%) from 2022 levels to $151.1 billion in 2023 (in inflation-adjusted terms, a 20% fall). Despite the decline, US net farm income in 2023 is higher than the 2020 net farm income by 38%, and its 20-year average (2003–2022) by 36%. The decrease is driven by falling commodity prices and cash receipts from farming, along with lower direct government payments and higher production costs. In particular, both crop receipts and animal or animal product receipts are expected to decrease by 4% and 5%, respectively. Even though the direct government payments continue to fall, the 2023 direct government payments are forecasted at $12.1 billion, reflecting the reduction in COVID-related assistance in 2023. As farm production expenses are rising, with the largest increases this year coming from interest expenses, the growth in expenses has caught up to the growth in revenues, making for tighter margins.

Eight of the nine crop reporting districts saw growth in their land values (Figure 2), with the Southeast and South Central districts reporting the highest percentage increases of nearly 10% or more. While these two districts have the highest percentage increases this year compared to other districts, the percentage increase in their values is almost the same as last year. The regional trends suggest that the surging land values are cooling off first in the northern and central districts, where they surged with a much higher magnitude, whereas the southern areas are following with a lag. While land values could be thought of as net income divided by interest rates, net income tends to be localized while interest rates are more universal. The strength in these districts reflected the competitiveness of the land market, more investor influence (especially for recreational land use in South Central Iowa), lower land availability (with roughly half of the regional respondents indicating fewer land sales), as well as the positive impacts of better-than- expected crop yields. While low-quality land experienced the largest percentage increase, specifically in the South Central and Southeast districts, the medium-quality land value change was only slightly smaller, with high-quality land capturing the smallest increase. Furthermore, previous research shows that experts’ estimates are less informative and noisier for low-quality land, suggesting that more trust should be put in the Iowa State University Land Value Survey for high-quality land values than for low-quality land values. It is also worth noting that low-quality farmland in the Iowa State survey includes pasture, timber, and recreational tracts.

Figure 2. 2023 Iowa land values by crop reporting district.

All Iowa counties except for 12 reported growth in nominal land values, although the magnitudes of increases are much smaller than in the previous two years–the largest percentage increase, 12.9%, was reported in Appanoose, Decatur, Lucas, and Wayne counties. Scott and Clinton counties reported the largest decreases at 3.9% and 1.9%, respectively. The 12 counties reporting a decrease in nominal land values are all located in Northwest and East Central districts, while the 45 counties reporting a decrease in inflation-adjusted values are distributed well in seven Iowa districts except for the South Central and Southeast districts where all counties report an increase. Moreover, in inflation-adjusted values, 68 counties have values that exceed the peaks from 2012 and 2013, and 42 of these counties have record-high inflation-adjusted land values. The 42 record-setting counties that truly posted historically high land values, include all counties from the Southeast, no counties from the Northwest and North Central districts, and a more equal distribution across other crop reporting districts.

While there has been a tempering of land value growth potential in the short run, generally, respondents expect higher land values in the future. Nearly half, 49%, of respondents forecasted a decrease in their local land market in one year, while the most selected answer (29%) was for less than a 5% fall in land values.

Looking five years ahead, 16% of respondents forecast a decline, growing from the 11% that forecasted a decline 12 months ago and the 6% that forecasted a decline two years ago. However, roughly 60% of respondents still expect a further increase in land values, with an increase of 10%–20% selected by the largest number of respondents (30%). This is consistent with respondents’ corn and soybean price forecasts–respondents expect stable to slightly rising corn and soybean cash crop prices. The Ag Economy Barometer led by Purdue University, a nationwide monthly agricultural producer survey, showed that the most surveyed farmers expect higher farmland prices 12 months from now, mostly due to strong investor demand which is expected to outweigh the rising costs, lowering prices, and higher interest rates.

There have been three 'golden' eras for Iowa land values over the past 100 years. The first one ended in a long, drawn-out decline in land values from 1921 to 1933, the second golden era ended with a sudden collapse from 1981 to 1986. The third golden era ended with an orderly adjustment in values from 2014 onwards as opposed to a sudden collapse. We are now at the cusp of another great period of farmland values, and if the economy bypasses a recession as planned, we should be able to end this era without a rapid collapse in land values.

Details on the survey can be found on the CARD website, and historical data can be downloaded in the AgDM Decision Tool Historical Farmland Values Data, or in AgDM File C2-72, Historical Farmland Values.

 

Rabail Chandio, extension economist, 515-294-6181, rchandio@iastate.edu