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With the new year on the horizon, it's a good time to reflect on the land industry in 2022 and what we can expect in terms of land prices and farmland values in 2023. To gain some insights, CMO Mac Christian from National Land Realty sat down with Professor and Crop Economist Gary Schnitkey from the University of Illinois on the National Land Podcast. Let's dive into their discussion and explore the factors that have influenced the market and what lies ahead.
Land Prices in Recent Years
Land prices have always been subject to various factors such as commodity prices, interest rates, and more. However, in recent years, external circumstances have significantly impacted land prices, setting the stage for the market in 2022. Professor Schnitkey highlighted the following factors and their implications:
"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."
The trade embargo in 2018 had a significant impact on farmland prices, causing a pause in their increase. The embargo, particularly affecting soybean prices, slowed the upward trajectory. However, the Market Facilitation Program payments mitigated the income loss due to price declines, preventing a decline in farmland prices.
How has Reduced Fertilizer Production Affected Land Values?
Throughout this year, resource shortages have played a crucial role in shaping the current market conditions. Droughts in many parts of the country have driven up the price of farmland, particularly in the Midwest where water for farms and crops remained scarce.
The Ukraine-Russia conflict has also affected the value of farmland due to reduced nitrogen fertilizer production. Professor Schnitkey explained how this shortage has impacted the market:
"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. 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."
"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."
The interruption in maintenance and the spike in gas prices due to the hurricane slowed down the production of nitrogen fertilizers, impacting farmland values.
2022 Land Prices
In 2022, farmland values witnessed remarkable increases, with the Midwest experiencing up to a 20% surge in states like Iowa and Nebraska. Despite the challenges faced, such as the factors mentioned earlier and federal interest rate hikes, land values have remained remarkably strong and stable.
"The land market, at least in the Midwest, went crazy last year. We've had 20-30% increases in land prices."
Going into 2023, there are concerns about a potential bubble and comparisons to the crisis of the 1980s. However, Professor Schnitkey reassures that the situation is different this time, and the risk is relatively low due to the low debt levels in the industry.
What to Expect from 2023 Land Values?
As we approach 2023, the land industry seems to be heading towards stabilization, with a possibility of a small decline in value. However, experts anticipate that land prices will remain strong and steady, even in the face of widespread economic challenges.
"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."
While caution is advised, it's important to note that investing in farmland still holds value and is considered a more secure option compared to other investments. With uncertainties in other markets, the stability of real assets like land is attractive.
Risk Management Strategies for Cropland Owners in 2023
To mitigate risk and maximize profits in 2023, Professor Schnitkey provides some recommendations for cropland owners:
- Set cash rents for 2023 at the current prices and consider marketing more products in advance.
- Be prudent with land investments and evaluate rental rates relative to potential changes in the market.
- Prepare for the possibility of small to negative capital gains from land over the next few years.
- Consider the impact of rising interest rates on all asset markets, including land.
In conclusion, while uncertainties persist, the land industry is poised for stability in 2023. By adopting cautious strategies and closely monitoring market conditions, landowners can navigate the landscape and ensure long-term profitability.
To delve deeper into Professor Schnitkey's insights on the 2023 land market and land prices, tune in to the full episode on the National Land Podcast.