With the new year quickly approaching, it's time to reflect on the land industry in 2022 and look ahead to what 2023 may bring in terms of land prices. In a recent episode of the National Land Podcast, CMO Mac Christian sat down with Professor and Crop Economist Gary Schnitkey from the University of Illinois to discuss the factors that have influenced the current market and the potential changes on the horizon.
Land Prices in Recent Years
Land prices have always fluctuated due to various factors such as commodity prices and interest rates. However, recent years have seen additional circumstances that have continuously impacted land prices. According to Professor Schnitkey, "Nothing has been normal since about 2018." Trade embargos, MFP payments, and the Covid pandemic have all played a role in shaping the market.
In 2018, the trade embargo caused a pause in the increase of farmland prices. Soybean prices were particularly affected since a significant portion of soybeans in the US are exported to China. However, the Market Facilitation Program (MFP) payments helped mitigate the income loss from price declines, preventing a decline in farmland prices.
How has Reduced Fertilizer Production Affected Land Values?
One of the significant pressures on land prices in 2022 has been shortages, including fertilizer shortages. The Ukraine-Russia conflict has resulted in a slowdown in nitrogen fertilizer production, leading to a shortage. This shortage has affected the value of farmland, as Professor Schnitkey explains.
The Covid pandemic disrupted supply chains and caused delays in obtaining essential items for farming, such as machinery parts and herbicides. Additionally, natural gas plays a crucial role in fertilizer production, and any disruption in the supply of natural gas leads to increased costs for nitrogen fertilizers.
2022 Land Prices
Despite the challenges faced in recent years, land values held remarkably well in 2022. In the Midwest, farmland values saw increases of 20% or more in states like Iowa and Nebraska. Federal interest rate hikes in the third quarter of the year did not significantly impact land values. According to Professor Schnitkey, "The land market, at least in the Midwest, went crazy last year."
What to Expect from 2023 Land Values?
Heading into 2023, the land industry seems to be moving toward stabilization. While a slight decline in value may occur, many experts anticipate land prices to plateau and remain strong throughout any economic hardships. However, caution is advised, as the longevity of high commodity prices and low-interest rates is uncertain.
According to Professor Schnitkey, land prices may hold steady or experience a slight decline of 5-10% and remain in that range for a prolonged period. While there may not be a significant crisis like the one seen in the 1980s, caution is necessary due to potential fluctuations in commodity prices and interest rates.
Risk Management Strategies for Landowners in 2023
To mitigate risks and maximize profits in 2023, Professor Schnitkey recommends several strategies. Set cash rents for 2023 and market more of the product for the year to ensure profitability in the current price environment. Landowners should also evaluate their rental rates and be prepared for possible decreases in the future.
For landowners considering selling their farmland, it's important to be aware that capital gains from land may be small to negative in the coming years. Additionally, it's crucial to remember that interest rates are rising for all assets, which will have an impact on land values and other asset markets.
In conclusion, while 2023 may bring stabilization to the land market, it's essential to approach it with caution. Develop risk management strategies and be prepared for potential changes in commodity prices and interest rates. For more insights on the 2023 land market and land prices, listen to the full National Land Podcast episode featuring Professor Schnitkey.