Five Factors Affecting Local Land Values
August 28, 2018
For the last four years, the land value benchmark study completed by FCI each summer has shown an overall decline in value. But in certain cases, values have risen year after year. What factors affect the overall trend in your local market? Download the full 2018 report for detailed findings.
1. Commodity Prices
Land values typically correlate with commodity prices. When one goes up, the other follows suit, helping fuel the dramatic rise in land values from 2003-2014 and contributing to declining values since 2015.
Exports are crucial to corn and soybean pricing. Illinois farmers are expected to export 2.225 billion bushels of the 2018-2019 corn crop and 2.04 billion bushels of new crop soybean, according to a July USDA report. If trade negotiations are made, a small correction to commodity prices may prove beneficial. However, if negotiations drag on and tariffs remain, commodity prices will remain low, translating to lower Illinois land values.
3. Rising interest rates
Historically low interest rates from 2008-2015 made the cost of borrowing money for land owners and farm operators decrease, allowing for increased investment. The cost to borrow money has increased as the FOMC raised rates by a quarter point seven times so far since 2015. Each hike reduces the demand for farmland and increases the competition of other investment opportunities.
4. Supply and Demand
Currently in Illinois, less than one percent of farmland transfers ownership in a calendar year. A large amount of farmland was sold before the end of 2012 in response to the possibility of changes to capital gains tax law. Since then, the volume of farm sales moderated and remains low. Even with signs of reduced working capital on some farms, there haven’t been many liquidation sales coming to the market. This lower supply coupled with steady demand, have caused prices decrease only slightly.
As with all real estate, location is key. Certain areas of the FCI territory remain closely held by a small number of owners. When a farm becomes available in these areas, there is more than sufficient demand, driving prices above typical market values.
Factors within and outside your local region contribute to its land values. Overall, farm prices are expected to continue declining moderately in correlation with lower commodity prices, rising interest rates, and lower net farm incomes. However, given your area’s market condition and its specific land class, farmland can deviate from the norm.