When speaking at the December Farm News outlook meeting in Fort Dodge, a subscriber came up to me to share his financial calculation on a farm that had just sold for $18,000 an acre. He owns land and has cash in CDs so could buy more. Eighty acres at that price costs $1,440,000. He thought that he could get $350 an acre cash rent which would be $28,000. I would expect cash rents will reset lower with land values soon as well.

CD rates have come down a little but using 4.5%, the principle spent on that farm would earn $64,800 in interest. That means that given cash rent, taxes and insurance … cash in the bank on interest would earn twice the return of a farm at current values. Farm operations are currently unprofitable so there is nothing to pick up to add there either. I would not bet on cash rent staying at current levels but think that interest rates will stay up.

The subscriber was in no hurry to buy more farmland at this time, content to collect interest. He also owns stocks, but was in the Warren Buffet camp on that investment class too.

If you have to borrow money to buy a farm it would currently appear to be a terrible investment. From a pure ROI perspective, farmland prices relative to CDs are too high yet. They had fallen about 15% from highs here in northwest Iowa. The Creighton 10-state Banker’s survey saw them expecting another 2.9% decline in 2025. CD cash grows at the rate of compound interest while near-term farmland price downside risk continues.

The net farm income outlook from grain production remains bleak but livestock producers are profitable. They buy farmland too. Tariffs would be a major threat to meat exports in 2025. Some noted a slight bounce in farmland prices post-election. I think that was relief from more favorable expectations as to how tax law will be handled by Republicans. Democrats threatened higher capital gains taxation and ending the stepped-up basis.

This CD versus farmland value comparison has come full circle. The last farm that we bought was for $12,500 acre in 2019. It had a CSR2 of 94.8 but needed fertility and tile. Interest rates were near nothing back then and cash rents were not that much less than today. Farming was profitable. Buying the farm made strong sense. There was investor interest in buying farmland back then because of the cheap interest rate and strong ROI.

That element is gone for now. There has been a significant gain in equity in the farm since 2019, and while farmland values may slip further it should be worth more than we paid for it. Buying farmland today from an ownership appreciation expectation may be less likely to be favorable in the intermediate term.

Long term, farmland has always been a good investment. It has been a good store of family wealth and I do not expect that to change. When a good farm comes up next to two farmers and they are both able to afford it, there have been some exceptional sales reported as they compete for the once-in-a-lifetime opportunity to own it.

The state average CSR2 is 68.4 according to ISU. High quality land above 90 CSR2 holds its value much better in economic troughs as being seen. It would be a better investment to improve farm drainage to help yields to make them better than to buy another average quality farm today.

After last year’s decline in farmland values, it was good to see them stabilize recently. Until the trends for costs, profitability and interest rates change for the better, there is no basis to get bullish farmland values. Some think that farmland values will trend higher with inflation. It is not the 1970s when interest rates and farmland values tracked together. There are still a lot of things that can go wrong with the ag economy and there is no evidence that markets are ready yet to climb a wall of worry. Remember, that wall looks like a wall cloud.

Another significant difference between today’s farmland market and conditions at the peak of the farmland market in 1980 is leverage. As farmland prices fell in the early 1980s, over-leveraged buyers found themselves quickly upside down with negative margins and were forced to give farms back to the market, which added downside pressure collapsing the market. Farmland prices fell 80% from their peak to their bottom in that cycle.

Seventy percent of farmland today is owned outright with no direct mortgage. I am unaware of any forced sales of properties sold recently. Banks severely restricted what they would lend per acre on farms, which kept the leverage at a minimum. Farms were bought with equity rather than debt. A 15% decline from recent peak farm values still leaves considerable room before equity is exhausted. Most farms being sold today are to settle estates.

A 2022 ISU survey found that 66% of Iowa farmland is owned by those aged 65 and older. This land will change hands with the next generation one way or another. Recent farm sales that I have been made aware of — one was to settle a family dispute and another to fund nursing home costs. Most buyers (70%) are now other legacy farmers with generational viability. As farmland is a long-term investment, buyers do age out with the life expectancy left needed to pay for them.

We are losing farmland in the U.S. each year. I noted a farm family from Texas that sold their farm there and relocated to Illinois seeing water issues becoming worse had they stayed. Aquifers are being exhausted, cost of water is rising and competition for water with urban development is shrinking the amount of arable farmland in some Southern and Plains states. An estimated 13 million acres was lost to urban development since 2000 and this conversion of farmland continues. Mark Twain said, “Buy land, they are not making it anymore.” That may be true here in the U.S., but unfortunately contrary to that sentiment, they are making more farmland in Brazil each year.