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With the new year quickly approaching, it may be helpful to take a look back at the land industry in 2022 and some of the things we learned, as well as where 2023 land prices may be headed in the coming months. Last week on the National Land Podcast, CMO Mac Christian met with Professor and Crop Economist Gary Schnitkey from the University of Illinois to discuss factors that have shaped the current market, as well as how things may change in 2023.
Land Prices in Recent Years
Land prices have always fluctuated somewhat, depending upon a variety of factors such as commodity prices, interest rates, and more. However, over recent years extraneous circumstances have continuously impacted land prices and set the stage for the market in 2022. Professor Schnitkey detailed these factors and their implications, stating the following:
Gary Schnitkey: “Nothing has been normal since about 2018, and I’ve been waiting for a normal year. In 2018, we had the trade embargo, in 2019 that continued and we had MFP payments, and then we had a really bad spring season with the MFP payments.”
“But we got through that and then in 2020, we introduced Covid and the control measures which threw us around for a while in 2021. And now in 2022, we’ve got this Ukraine-Russia thing. I’m looking for a normal year again, whatever that is.”
Mac Christian: You know that phrase, “the new normal” keeps going around, and I don’t think I can hear that phrase anymore. What does that even mean now? But you mentioned the key event in 2018, and we had a new administration, but what did those embargos do to cropland in your area and nationally?
“In 2018, it actually caused a pause in the increase in farmland prices. We were pretty concerned about where those were going to go. That embargo in particular hurt soybean prices.”
“We export 50% of our soybeans in this country, and most of that goes to China which was a major target of these embargos. What smoothed that out was the MFP payments, the Market Facilitation Program payments, which were quite large.”
“So those MFP payments came in and slowed or made up for the income loss due to price declines, they were a stop-gap measure. And I would say that those caused farmland prices not to decline. If you look at it, farmland prices have been on a steady upward trajectory since the middle of 2005-2006. They started to slow in that era, but we seem to have gotten through that pretty well.”
How has Reduced Fertilizer Production Affected Land Values?
Throughout this year, one of the largest pressures on land prices has been shortages. A variety of resource shortages have played a large part in sculpting the current market conditions. Take for example the droughts experienced by many parts of the country over the last year which has driven up the price of farmland in places like the midwest where water for farms and crops remained readily available.
Similarly, nitrogen fertilizer production has slowed in the wake of the Ukraine-Russia conflict which is likely to continue to affect 2023 land prices. This conflict and the resulting shortage have affected the value of farmland, as Professor Schnitkey explains.
“Immediately when Covid hit, we were particularly concerned about corn prices because we make corn into ethanol. Fuel demand went down and we saw corn prices decline pretty dramatically from March of that year until August. Well then something happened and they began going up again. I guess Covid turned out not to be as bad as we thought on the demand side, and China began buying again.
So on the demand side, it turned out to be not as bad as we thought. However, I don’t think midwest farmers are all that different from everybody else, but I think Covid really hit our supply chains and made life harder. This isn’t going to be any different from any other business, but you can’t get parts for machinery, anything you want to buy is delayed. Herbicides were a big issue.”
Yeah we heard a lot about that over the past couple years, and coming up into 2022 as well, it’s been a conversation that’s been pretty prevalent.
“Yeah, that sort of began the rise in fertilizer prices. This is because Covid slowed the maintenance of nitrogen fertilizer plants in the gulf area, Louisiana and Mississippi. They had to do maintenance in mid-2021 and lo and behold, a hurricane went through there which further delayed those maintenances. And that’s where we saw prices of nitrogen fertilizer increasing.”
In discussions that we have on crop prices and land prices, a lot of the attribution goes to fuel, or the increasing price of commodities due to a lack of imports from places like Ukraine and Russia in the last couple years, but you touched on the price of ammonia because it goes into the production of nitrogen fertilizer.
I didn’t realize that natural gas played such a huge role in that, and how a hurricane going through there would mess things up. A lot of people talk about administration policies and how we’ve cut domestic oil production, but when you really look at it it has more to do with these disasters hurting the supply chain upfront.
“Yeah, so nitrogen fertilizers are important for both corn and wheat. The production of those occurs in plants in Louisiana and the Gulf area, but a prime ingredient in fertilizer production is natural gas. Natural gas is used to make anhydrous ammonia, and then from there, we get all these other fertilizers.”
“Natural gas is extremely important in fertilizer production, so whenever pipelines in Oklahoma and Texas shut down, that’s a big deal! And all of that in the gulf area was slowed down because of Covid and the need to do maintenance, and then you have hurricane Ida which spiraled up gas prices.”
“So as this all relates to land, we go through the Covid epidemic, the supply chain is absolutely messed up, the last year and a half have been a mess right? Then you have Russia-Ukraine, which is something like 30% of the world’s wheat supply and natural gas throughout Europe. What are the other key products in Ukraine? I know wheat, I believe barley is a big one as well.”
“They have oil seeds as well, they’re a soybean producer and sunflower, canola. Ukraine is a bread basket of Europe, so you take that out and you’ll have an impact on a lot of things. But wheat is the one that immediately gets the attention since they’re a major wheat producer and a lot of that goes to countries that are poorer and need those calories to keep their diets going.”
So when that supply shuts down, that puts a lot of pressure on countries like us, right? And it drives our prices up so we’ve got increasing expenses to maintain crops and increasing prices in crops. Are those balancing out?
“So far, and that’s exactly right, Ukraine did both. On the positive side for US farmers and from an income standpoint, they did increase commodity prices of wheat, corn, and soybeans. At the same time, they did increase costs, in particular fertilizers. This is because Russia is a major producer of all fertilizers and if you make their product harder to get and slow the supply of natural gas to Western Europe, you’re going to raise costs and add uncertainty.”
2022 Land Prices
In 2022, we saw some incredible prices especially when it came to farmland. In the midwest specifically, there were increases of 20% to farmland values in states like Iowa and Nebraska. Despite all of the challenges previously mentioned as well as federal interest rate hikes in the third quarter of the year, we’ve seen land values hold remarkably well as Professor Schnitkey states below.
“The land market, at least in the midwest, went crazy last year. We’ve had 20-30% increases in land prices.”
Illinois experienced 1000 dollar per acre increases over the last year, but then when we look at Ohio and Nebraska, they’re up to $27,000 per acre in some areas.
With these values, a lot of people have spoken to the 1980s crisis or the late 1970s when there was a sort of bubble there. There’s a lot of fear in the language people are using with those land values. And we’re looking at that with the Ukraine-Russia conflict Are we looking at a correction as that conflict ends? What are some of our risk areas?
“First off, I would say we’re not looking at a crisis like the 1980s because If you look at debt levels around here, they’re really low. So we don’t have people going out and buying land and using debt capital to do it, because lenders won’t let them.”
“We don’t have that issue going on. There are actually two longer-term trends that cause you to pause. I mean, how long can these commodity prices stay up at the levels they’re at? An old AG economist like me would say, the first time we get a large crop in Brazil or here, we’re going to see those prices decline.”
“Maybe that’s true, maybe that’s not, but that would be the trend. And then also, how long can interest rates remain at a higher level? These rates aren’t that high, and you have to imagine that all asset prices, including land values, will have to adjust to this “new normal.”
What to Expect from 2023 Land Values?
Headed into 2023, while many sectors of the economy brace for a recession, the land industry seems to be headed toward a stabilization. While value may see a small decline, many anticipate 2023 land prices to plateau and remain strong throughout any widespread economic hardship. While there is always going to be a risk, as Professor Schnitkey details below, 2023 is shaping up to be a solid year for landowners and land prices.
How long do you think these interest rates are going to remain? At a higher level, you know?
“So, I don’t necessarily think we will see a large decline in land prices, but I could see them holding steady and maybe downward, you know, 5-10% and staying there for a very long period.”
Okay, so you think it’s moving towards more of a sort of stabilization, more of a plateau, kind of stage where, you know, we see some, you know, you’re gonna see up and down but not as far as the high swings that we’ve had here lately.
“I don’t see how you can keep going up, right? I mean there’s nothing fundamental out there that sees you’re going up.”
“I get the impression that there’s still money that wants to come into agriculture, not because it’s a great investment necessarily, but because all the other investments, don’t look very good either. I mean, are you going to leave money in the stock market now? I mean that could be just as over-capitalized as land, right? And usually, if you’re looking at a turmoil, you would prefer to own a real asset than a financial asset.”
Right, right. Well, and that’s something that’s been pumped up over like the last decade. When you look at market capitalizations of domestic equities, they use the PE ratio there to examine where it is. Like that went out of balance five years ago.
And then with the yield curve invert a few years ago, there’s danger territory, but everyone keeps on the hyper rationalizing by saying, “Oh no, it’s fine.” That sounds like the wheels are falling off the airplane, right? It’s gonna be a little bumpy and there is some risk there.
“Yeah, there is some risk there. So, there is some risk there and it could decline. And I think that all comes back to what you believe is going to happen to commodity prices in the longer run. I don’t see how they can stay up at the levels that they are. And if you’re looking at bids for next year, they’re coming down.”
“But here’s the question. We’re thinking we’re moving into a recession, but I suspect that recession is going to have a much larger impact on tech stocks than on real assets. You know, people still want real things, right?”
“So that would be the one where I would be more concerned about if I was in that industry. You know, the good thing about a recession is that it wipes out a lot of false hopes. Well, there are quite a few false hopes that need to be wiped out probably in that sector. Like how we had the.com boom in the 2000s.”
It’s gonna be another, it’s kind of a mass Darwinian thing that you have in technology every few years. And I think that a lot of Individuals when they’re looking at land in general, it gets associated with real estate, because it gets sold like real estate. Real estate brokers work with it and they associate it with residential real estate, which is going through a heavy correction right now.
And the difference is you live on residential real estate, but cropland produces your food and it has real attainable value and it produces money and things that people need. Compare this to your house, which doesn’t do any of that, and yet they get lumped together as the same thing. And so people get the same fears about those and it’s like, well, the residential is correcting, what’s gonna happen to land? And so going into 2023, you can see that kind of fear happening.
“Yep, there are reasons for Caution. Let’s use the word caution. Now again, I personally would think of a period of steady land prices to slight decreases would be sort of good for everybody.”
“And here’s the good thing about farmland. This happens to be from one of my good friends who is a farm manager Farmland, if you’re in the right area, has a hundred percent occupancy.”
“So, you can get it farmed. I would look for some retrenchments in the future if you’re at the high end, which some people are. But yeah, retrenchments are better than no occupancy.”
Risk Management Strategies for Cropland Owners in 2023
Many landowners will be looking for ways to mitigate risk and maximize profits in 2023 given the market conditions detailed above. In order to ensure that your farm stays profitable and your land retains its value, here’s what Professor Schnitkey recommended:
“So, one of the things that I would tell cropland owners is that they should try to be getting their cash rents set for 2023. I’m suggesting to farmers that they market more of their product for 2023 now more than they usually do.”
“That isn’t necessarily a projection of where prices are going, but a note that at the current price levels we can be profitable and it might not be profitable as we move forward. For landowners, I’d recommend just being kind of prudent with your land investment. And again, if you’re landowner, you know, be prudent with that.”
“And I would also evaluate where your cash rents are or your rental rates are relative to what could happen. Are you at the high-end or at more of the mid-range for cash rental rates in your area? If you’re at the high end, you might make plans for that to come down and make sure that you can sustain that.”
“For landowners, you know, over the next five, six, seven years, the capital gains from land, may be small to negative, and that’s the environment that you’re probably living in for a while. So, get used to that.”
“And I would also caution the landowner if they think they’re going to sell the farmland and invest in something that has capital gains, remember, interest rates are going up for all assets. It probably has a larger impact on land, but you’re going to face that headwind in all your asset markets.”
If you’d like to learn more about Professor Schnitkey’s thoughts on the 2023 land market and land prices, listen to his full appearance on the National Land Podcast here!