Possible turning point for land prices

What if current grain prices and squeezed margins are the new normal? Certainly, there are well-capitalized operations with a great deal of resilience. However, you have to think there will be operations financially stretched by aggressive expansion.

Timing is everything when a new producer starts out or when a farm makes a major expansion. Buying land at its peak price in the early 80s was the death knell for many farms. Low grain prices and extremely high interest rates caused land prices to drop and equity to erode.

On the other hand, buying land in the early 90s was great timing. Land prices turned around and started to escalate around that time. In the last 15 years, land price increases have been amazing. Land always seemed too expensive at the time, but a year later looked like a great investment.

Land rarely pencils out based on productive value, but few investments have been as lucrative. As memories of the ugly 80s fade, many have adopted the attitude that land prices will never go down. Best to never say never.

Unlike the 80s, investment companies have become significant land owners. With higher interest rates, lower commodity prices and potential difficulty extracting as much cash rent, will some of the investor land come back onto the market?

And will some producers aggressive with land and equipment purchases run into financial difficulty and be forced to liquidate some holdings? This is probably most likely in the regions hit with successive years of drought.

The rules of the game change will change if land prices stabilize and start to show some weakness. In the 80s, producers often ended up owing more on their land than it was worth. Any equity was gone. At that point, might as well hand it over to the lender and walk away.

Land price data for 2023 will no doubt show a continued increase in values. The FCC Farmland Values Report for 2023 comes out March 12, but the real test will be 2024. Watch for lenders to tighten up based on the lower commodity prices reducing repayment ability. This too can have a dampening impact on prices.

Maybe the current low grain prices will be a relatively short-lived blip. As well, interest rate pain is nowhere near what it was in the 80s. Still, it might not take a lot to tip over a land market that has increased so dramatically.

The factors feed off each other – lower commodity prices, higher interest rates than we’ve seen in a long time, a change in investor priorities, high land price fatigue, tightening credit and some producers that are already overextended.

On the other side of the equation, you have well capitalized farms still in expansion mode and the prevailing belief that land prices always keep going up. If, however, that attitude changes, no one wants to buy land only to watch its value decline. Psychology can play a large role.

If grain prices make a miraculously recovery to restore past profitability, the future will probably look a lot like the recent past. Stating the obvious, the longer grain prices remain subpar, the more likely we’ll see a land price correction.

Many regret not being more aggressive with land purchases when prices were lower. Some seem to relish the thought of financial difficulty for those who have rapidly expanded. However, wishing for lower land prices means wishing for tough times in the grain sector, so we should be careful what we wish for.