Farmland prices are increasing at slower rates than in recent years, but land remains a desired asset. Farmers consider cash on hand, profitability of the land and location when deciding whether to buy farmland.
hen it comes to buying farmland, there are several factors to consider.
University of Illinois ag economist and professor Bruce Sherrick says a core consideration is the land’s earning and profitability potential.
“As with every asset, land is what you can make off it,” he says.
Of course, other factors can change the value to a particular farmer, such as location.
“A farm that borders you is worth more to you,” Sherrick says.
University of Illinois ag economics professor Nick Paulson says location is one of the most important things for farmers.
“‘Location, location, location’ couldn’t be more fitting,” he says. “Obviously you can’t move farmland. It has to fit with the operation if the intent is to buy it to use in production.”
Paulson says farmers sometimes have to wait a long time before they get a chance to buy a certain farm, and they don’t sell land very often.
“It’s that 80 acres across the road they’ve had their eye on for years and years,” he says. “For farmers, we buy farmland, we don’t sell it.”
Sherrick says farmers weigh their cash on hand, what they can make off a farm and how it fits with their operation, and this drives their purchasing decisions.
“I think markets are incredibly rational,” Sherrick says.
Iowa State University economics professor Rabail Chandio works at the university’s Center for Agricultural and Rural Development. She says survey results show the majority of Iowa’s farmland is bought by people who plan to farm it themselves.
“Most of the people who are buying farmland in Iowa are existing farmers,” she says.
For both farmers and investors, land is a good way to combat inflation, as it reliably increases in value over time.
“Farmland has always been attractive as an inflation hedge,” Chandio says.
Interest rates have surged in recent years, which Sherrick says could impact non-farmer investors looking to buy land more than it affects farmers, although it is an issue for some. He says farmland investors may look elsewhere for returns.
“People who have money to invest, suddenly treasury bills, other things I can invest in suddenly generate a higher rate than farmland,” Sherrick says.
Many farmers are buying land with smaller amounts of debt or buying outright with cash, especially after years with good overall farm profits from 2020 to 2022.
“Farms have very little debt,” Sherrick says. “The sector is very low-debt.”
He says the total debt load for U.S. farmland is about 13.9%, and any farmers who have fixed-rate debt at 3% likely don’t mind it given current debt levels.
The surge in interest rates is more of an issue for younger farmers who have to use more financing in their operation and also farmers who rent more ground.
