The short- and mid-term impact of COVID-19: farmland market

Farmland market value is in some ways a key indicator of general economic attitudes and for the broader health of the agriculture sector. It’s a safe haven when other macro markets are volatile. So, how are land values responding to the COVID-19 pandemic? What economic strain is it exerting from the farm and beyond?

Minimal impact in the short-term

The short answer is: COVID-19 really hasn’t impacted farmland market value yet.

There’s been relative stability in the overall marketplace. Before COVID-19, trends indicated consistent demand in place. Recently, demand had been ticking slightly lower. While the pandemic and its human response could have accelerated that trend, the downward trend had yet to begin happening by mid-April.

“We can envision scenarios where there’s more pressure on land values moving forward given the challenges we’re facing right now. But the data we’ve been collecting still show that farmland market values have been holding up okay,” said Nathan Kauffman, vice president and Omaha branch executive for the Federal Reserve Bank of Kansas City. “There’s not a lot of land transacting, and that’s reasonable right now.”

Farmland market value in a time of angst

Land value is one of a few markets that attract investment capital in times of general societal angst. It goes through periods of high price volatility. This happened in the 2000s and early 2010s when grain markets drove prices sharply higher. Buying land is a long-term investment. Whether it as a financial haven or an operational asset, prices typically lag other more active markets, like on Wall Street.

Many markets react sharply from day to day from crisis. This was seen quickly from businesses at the early stages of the COVID-19 pandemic. Farmland market value volatility lags compared to other market values, which make it an attractive investment option. According to Steve Bruere, president of Peoples Company, a farm real estate brokerage and management company based in Iowa, other markets will sometimes exert pressure at the same time, pulling the market in different directions.

“It’s not plausible that you’re going to wake up one morning and a farm that was worth $10,000 an acre the day before is now worth $7,000 an acre,” Bruere said. “I’m watching crude oil closely right now, especially as it relates to ethanol production and corn demand. If you kill ethanol demand, it could be bad for the land market. If that happens, it will still take a while for it to affect land prices.”

Other variables indicating relatively steady land value

Despite that bearish pressure, “the price of corn has held in there fairly well,” Bruere added. Ethanol is just one component of demand for the corn market.

The real danger is in the long term.

“We have some conflicting variables like crude oil prices and federal monetary policy,” Bruere added. “I think land values will stay pretty steady, and if they do lean one way or another, land values could tend to go up because farmland is a safe haven.”

Crude oil

This long-term scenario is driven primarily by the current state of the crude oil market than the impact of the COVID-19 pandemic. Farmers are generally using their purchasing power to maintain necessary inputs to sustain their operations. Land is a large component of that input mix. The bearish pressure exerted by COVID-19 and low crude oil prices could cause erosion in that influence over time. A wholesale drop in land prices would be a leading indicator that it is happening.

“We’re in year seven of this downturn in commodity prices, and we may see farmers with less ability to continue buying farms adjacent to theirs,” Bruere said. “Adding the pressure of COVID-19 and crude oil price volatility, could run farmers out of their ability to buy, and that’s going to be bearish for land values.”

Interest rates and federal monetary policy

A final variable that could influence farmland market value in the post-COVID-19 age is interest rates. The Federal Reserve lowered the key federal funds rate to near zero in March 2020, however, other rate sectors — such as mortgage rates — didn’t follow the drop on a wholesale basis. The rate spread will prevent a sharply bullish impact on land prices. It will also help sustain interest in farmland as both an investment and an operational asset.

Ultimately, that means that while there could be slightly more volatility, the farmland market value will likely remain fairly stable barring any considerable change — positive or negative — in the outside and fundamental markets, as well as other factors that normally contribute to price direction.

Editor’s Note: This is part six in our series of the effects of the COVID-19 pandemic on the agriculture sector. See more here.

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