EAST PEORIA, Ill. — New factors driving farmland values will offset high interest rates and projected lower farm income in 2023; keeping farmland a solid investment. This is according to Nick Paulson, University of Illinois agricultural economist, who said the “new factors” sustaining farmland values include wind and solar diversification, along with the potential for added value through expanded carbon sequestration program opportunities.

“Considering the traditional fundamentals we use to consider the farm market, things are looking kind of negative at this point: lower prices, lower incomes heading into 2023, higher interest rates. But there are some new factors that are probably driving farmland prices and the farmland market now,” said Paulson, speaking to farmers and agribusiness professionals at the 2023 Illinois Farm Economics Summit in East Peoria. “There is a lot of optimism that we are not heading for a huge drop in farmland values, at least in the next year or two.”

The U.S. ag sector remains on firm financial ground going into fiscal year 2023, according to Paulson. He expects the 2023 U.S. farm asset value to be placed at upwards of $4.2 trillion by the United States Department of Agriculture (USDA) when new estimates are announced in February, with a debt-to-asset ratio of around 13 percent. 

“With all of the commercial grain operations located in the Midwest and Illinois I would expect the debt-to-asset ratio there to be more like 20 percent, but (U.S. agriculture) is still a very low-leverage industry with a solid balance sheet,” Paulson said. 

Property values have increased since 2020 to reflect higher commodity prices and incomes. A recent Plymouth, Iowa, farmland transaction made headlines for its selling price of $25,000 per acre. This latest increase in farm property values will also trickle down to cash rent amounts paid by non land-owning farmers to landlords in 2023.

“There was a big increase in cash rent levels from 2021-2022. Illinois Society for Professional Farm Managers data for 2023 shows that though income appears to be lower in 2023, we’re probably looking at another cash rental increase depending on who you contract with. By 2024 we’re expecting a leveling off (of rental rates),” Paulson said. 

Return rates on farmland investment remain attractive and consistent, with average yearly returns of 7-9 percent (Indiana, Wisconsin, Minnesota, Nebraska and Kansas farmland returns averaged greater than 9 percent). 

‘From 2021-2022 there were even bigger numbers,” said Paulson. “Increases in farmland values were over 10 percent, and as much as 25 and 30 percent in some states. Think about how that compares with other asset classes.”

Projected farmland returns in terms of levels, volatility and risk are favorable for state and national investment, the economist concluded. “The other thing that farmland does is provide you a nice diversification effect in an investment portfolio, if you think of it as an asset class.It has a moderately negative correlation with equities, and it’s a great thing to have negative correlations in an investment portfolio. Farmland has also historically provided a pretty good hedge against inflation,” Paulson said. 

More good news could be on the horizon for farmland values. Expanded wind energy efforts are expected to increase farmland values by as much as $150 billion, while carbon sequestration is expected to bring landowners upwards of $90 per ton in the coming years. 

“Carbon sequestration payments will add hundreds of millions in farmland value over the coming years,” Paulson announced. “New value drivers are continuing to be introduced that will continue to support higher farmland values.”

The 2023 Illinois Farm Economics Summit was held January 10 in Mt. Vernon, Jan. 11 in East Peoria and Jan. 12 in Dekalb, Illinois. It was hosted by the University of Illinois farmdoc team.