Prices for prime farmland in central Illinois are at an all-time high and show no indication of reduction in the near future. The opportunity to invest in agricultural real estate has never been more attractive, but are these robust prices crowding out new and beginning farmers – defined by the USDA as producers with less than 10 years of farming experience? field – of the land market?
“We see young farmers all the time taking advantage of low interest loans in coordination with their local bank to buy land,” said David Klein, vice president, auctioneer and chief broker at First Mid Ag. Services, a Bloomington-based agricultural real estate company. company that manages more than 1,000 agricultural properties in central Illinois and the Midwest. “It works like a real estate mortgage to some degree – 20 or 30 years, and the USDA is able to provide incentives and savings on the interest rate for these young farmers.”
However, there is pressure on the Biden administration to do more to allow beginning farmers — many of whom cannot secure loans large enough to buy enough acreage for anything other than small, specialized operations — to compete for that farmland is increasingly gobbled up by mega farms and capital. investors.
Factors fueling the outbreak
Farmland values are up 23% from a year ago in the Midwest, fueled by soaring commodity prices.
“The spike in farmland values is due to many of the same factors that fuel inflation in the general economy. Grain prices went up until recently, and that was a big factor. As grain prices rose, so did land values,” Klein said, adding that most farmers had already locked in their fertilizer purchases for the 2021 farming season before prices for all types of fertilizers begin a historic ascent.
Investors buying up farmland for alternative uses such as wind and solar farms are also on the rise, helping to fuel both demand and land values, according to Klein.
Highlights from the Illinois Farmland Values and Lease Trend Report for 2022, published by the Illinois Society of Professional Farm Managers and Rural Appraisers (ISPFMRA), were presented at the 2022 Illinois Land Values conference which s is held in Bloomington. The data was organized into 10 regions covering all 102 counties in Illinois, with each region assigned a committee to compile the data and results.
The survey confirmed McLean County’s reputation as home to some of the largest agricultural real estate acreage in the state, with most cultivated land rated Class A, or the best of the best. Class A agricultural real estate saw the largest increase in value from 2021 to 2022, according to the ISPFMRA report.
“At the top of the list were Class A or ‘Excellent’ areas. It’s a number that may take your breath away, but across the state, areas with Class A farmland saw a 30% increase from 2020,” reported Luke Worrell, of Worrell Land Services. in Jacksonville, who was general president of the 2022 Illinois Farmland Values and Survey. “The jump did not end with an A-class area. The lower classifications such as B (good), C (medium) and D (fair) all recorded collective jumps of 20% or more. Even recreational or mixed-use properties have increased significantly in some pockets of the state.
In the report, Worrell noted that the timeline has shifted to 2021 with land sales up and not backing down. At least two major factors contributed to the price spike, according to Worrell.
“Many producers have been able to sell their 2021 grain for almost 50% more than they did with their 2020 grain. It stands to reason that when potential gross farm income can see this jump, values could rise. Moreover, interest rates are still historically low. Borrowing capacity is strong and there are many cash buyers,” he said.
Easing tensions with China over Trump-era trade embargoes and other macroeconomic developments have helped increase demand for Illinois grain, further improving land values, Worrell said, as did a reduction in the number of farms available in 2020 compared to the previous year.
“These reasons and other moving parts of a global economy drive the market higher,” Worrell said.
New and beginning farmers targeted for growth
A recent Bloomberg opinion piece by columnist Adam Minter noted that about 23% of newbie farmers sell at regional and local markets and — as any visitor to a Midwestern farmers’ market can attest — many between them are young.
“However, like younger homebuyers in big cities, they rent more and own less land than their veteran counterparts. Today’s soaring land prices make the challenge more difficult. But it’s definitely not a new challenge,” Minter said.
In the 1980s, Congress required banks to participate in agricultural loan programs to embrace young, beginning, and small farmers. The program and others like it have had moderate success, according to Minter, but the continuing ownership gap suggests participating banks could do more.
“To encourage them, President Joe Biden’s administration is proposing to start grading banks on how they extend credit to new and beginning farmers. His rule, which is in the middle of a 60-day comment period, would encourage lending. It should pass,” Minter said.
“In the meantime, Congress should consider measures that will encourage retiring farmers to sell their land to new ones. A model can be found in Ohio, which recently created a program to provide tax credits to farmers who sell or lease land to young farmers under certain conditions.
Klein points to the grant programs available from the USDA for beginning farmers as proof that federal land acquisition assistance exists. He also believes that local banks are generally willing to lend money to beginning farmers, but only to the extent of their ability to repay the loan.
“One of the lessons of the 1980s was not to lend money solely on the value of the land itself, but also to understand what the income potential of the land is, and not to let the borrower becoming so over-leveraged that if things got worse in the value process, they weren’t upset until now that they couldn’t get out of it,” Klein said.
The future remains bright for farmland investment
Cropland is an investment that has consistently proven to be profitable, making it a target for equity investors and non-farmers looking to buy land, especially in central Illinois.
“The farmland is like class A stock. We have some of the best farmland in the world and we are very lucky to be in a very productive region with good weather conditions. This leads to higher production and higher returns for farmland,” Klein said. “When you add the alternative uses, they all help stabilize farmland values, relative to what commodity prices can drive up and down.”
In the ISPFMRA Farmland Values 2022 report, Worrell acknowledged that the number of farm sales to individuals or families looking to get into farming in 2021 was lower than in previous years.
“While we still see a majority of local buyers, the presence of large institutional buyers and interest from the ‘mega-rich’ has increased over the past year,” he said.