URBANA, Ill. — Farmland values could eclipse historical rates of increased yearly value in the next four to five years, according to the director of the TIAA-CREF Center for Farmland Research at the University of Illinois.

“I’m going to be an outlier. I think that in the next four years farmland values will increase by more than five percent total,” said Bruce Sherrick, who in September determined that farmland values rose by an average of 1.6 percent during FY2020 across Illinois. “If we have a return of inflation I expect farmland to behave as it always has. If we don’t have a return of inflation I expect farmland to behave as it always has. In both cases, the income prospects moving forward, to me, sure do support an increase in valuation by more than 1.25 percent per year.”

While farmland values in neighboring Iowa fell by around 1.7 percent this year, Illinois prices managed to gain value despite challenges presented by the COVID-19 pandemic and other factors. During a Dec. 15 Farm Economics Summit webinar, Sherrick described the factors affecting farmland values during the turbulent year. 

“We’ve had massive trade disruptions heading into 2020, exchange rates that I thought were getting stronger but had kind of a pullback, and interest rate market intervention,” he said. “When 2020 hit we changed our demand for commodities resulting in food consumed more at home than in restaurants. At the same time we quit driving, so ethanol demand shrunk considerably. (But) we have had a series of interventions in farm policy with payments from MFP, CFAP and related support programs. 

“Looking at the farmland market moving forward, it is a very complicated market because transactionally it is such a thin margin. We look at the impact of inflation in case it happens, trade effects, and the cost of capital at a historic low.” 

Sherrick noted that the incoming Biden administration is signaling the desire for farm policy based, at least in part, on sustainable agricultural practices. The rural appraiser advised landowners that government-mandated changes in agricultural-environmental field management would not necessarily affect farmland values in any manner.

Importantly, Sherrick also noted that the Fed is signaling an intent to target higher inflation, and advised investors to keep an eye on how the changing posture on trade and world demand could drive commodity prices— though perhaps not clearly linked to dollar prices. Historically, he reported, farmland offers positive portfolio benefits in well-diversified holdings due to the relative lack of response and adjustment to short-term market movements. 

Positive farmland returns are historically linked to inflation. In a poll of more than 800 webinar attendees, 39 percent of respondents said they expect inflation to increase by an average of 1-2 percent over the next three or four years. Thirty-eight percent indicated they expect inflation to rise by an average of 2-3 percent per year under the Biden administration.

“Historically you can see that when inflation was higher the spread was higher. Around 2015-18 the spread was much tighter, and I think you will see this (relative) trend continue,” Sherrick said. “In the last ten years we’ve seen an almost five percent return over inflation in farmland.”

This makes for a “very rational” farmland market, Sherrick continued, that allows values “room to run” in times of prolonged inflation. 

Among the big questions affecting short and medium-term farmland values include whether the results of the 2020 elections were beneficial to agriculture in terms of support for ad hoc payment programs, enforcement of conservation initiatives and other policy decisions, according to the U of I real estate expert.

“You have to be careful talking about the scale and the permanence of these (policies), but they certainly will become part of the big agenda moving forward,” said Sherrick.

A final poll of webinar attendees revealed that 61 percent expect farmland values to increase by 0-5 percent over the next four years, while 26 percent predict values will increase by more than five percent. But even if farmland values were to increase by more than five percent in the next four years, investors should not necessarily expect an equal bump in income, Sherrick cautioned. 

“Relative to this year, I would say not,” he said.

Five webinar presentations associated with the U of I’s 2020 Farm Economics Summit, including Sherrick’s Farmland Markets and Macro Markets, can be accessed at https://farmdoc.illinois.edu/ifes.