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Source: FarmDoc Daily news release

Farmland prices have increased by large amounts over last year's prices. Even given these increases, farmland prices still are near levels suggested by the historical relationship between farmland prices, farmland returns, and interest rates. Significant declines in farmland prices could occur if 1) commodity prices fall from current expectations or 2) interest rates increase because of Federal Reserve Bank (FED) actions to fight inflation.

Farmland Price Increases in 2022

The National Agricultural Statistics Service released land values and cash rents for states in the U.S. For 2022, average Illinois cropland prices are estimated at $8,950 per acre, a record level 13% higher than the 2021 level of $7,900 per acre (see Figure 1). The last time Illinois land values increased by more than 13% was in consecutive years in 2011 (16% increase), 2012 (15%), and 2013 (14%). Since 1970, land values have increased more than the 2022 increase in 19% of the years, suggesting that the increase in 2022 is high but also is not a unique event.

Other studies confirm rising land prices in the Midwest. The Chicago Fed's AgLetter indicates land values in the northern 2/3 counties of Illinois increased by 18% between the second quarter of 2021 and the second quarter in 2022. A Purdue Agricultural Economics Report indicates Indiana land values increased by over 30% from June 2021 to June 2022. A Farmland Value Benchmark Study prepared by appraisers at Farm Credit Illinois evaluated 20 benchmark farms over the southern 60-counties of Illinois. From July 2021 to July 2022, land values averaged a 28% increase on Farm Credit Illinois's benchmark farms.

Overall, much of the land price increase appears to have occurred before April 1. The Chicago Fed, for example, indicated that land values in Illinois did not change between April 1 and July 1, 2022. Likewise, most of Indiana's increase occurred in the last half of 2021 rather than the first six months of 2022.

Factors Impacting Farmland Prices

Most economists believe the price of farmland should equal the discounted sum of all future returns to farmland (see here for more detail). Obviously, returns and discount rates in the future are not known with certainty. Expected future returns are proxied by cash rents, with the presumption that current rent levels provide some indication of future rent levels. Current interest rates are often used to measure discount factors, also under the assumption they represent market expectations for the future. Cash rent levels and interest rates are discussed in the following two sections. The combined effects of the two factors are then evaluated in the "Capitalized Values and Farmland Values" section.

Farmland Returns

Higher cash rents usually lead to higher farmland prices. NASS estimated the average cash rent in Illinois for 2022 at $243 per acre, up by 7% over the 2021 level of $227 per acre (see Figure 1). The $243 rent for 2022 was the highest rent level in the history of Illinois.

Overall, rising and high 2022 cash rents are the result of high returns to farmland caused by:

high commodity prices in recent years (see farmdoc Daily, August 2, 2022) and
ad hoc Federal payments from the Market Facilitation Program (MFP), Coronavirus Food Assistance Program (CFAP), Wildfire Hurricane Indemnity Program-Plus (WHIP+), and Economic Relief Program (ERP).
Higher non-land costs also have occurred, but not to levels that offset higher commodity prices and ad hoc Federal payments. Returns for 2023 likely will be positive if corn prices are in the mid-$5 range and soybean prices are in the high-$12 range. At this point, fall 2023 bids are at those levels, suggesting that there will not be downward pressure on cash rents.

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