Nate Bruce, Farm Business Management Specialist, nsbruce@udel.edu
Mentioned last month, the Federal Reserve approved a half-percentage point interest rate hike to combat inflation. This was unusual as the Fed typically adjusts interest rates by quarter percent changes. Farmland values will more than likely not be impacted by inflation. Many investors view farmland as a hedge against inflation. In addition, high commodity prices continue to remain strong, supporting farmland asset values. The price of land will more than likely remain strong with higher interest rates.
The United States Department of Agriculture (USDA) tracks average cropland asset values year to year. Some states have higher average cropland asset values. New Jersey and California have some of the highest average cropland asset values sitting at $12,000 / acre. Montana has some of the lowest average cropland asset values of all fifty states at $1000 / acre. Delaware sits on the higher spectrum compared to most states. The average cropland asset value in 2021 was $8,600 / acre.
Below is a graph that shows the average cropland asset values in Delaware from 1997 to 2021 and a projection based on observed values where farmland asset values will increase or decrease up to 2025. The blue line represents the observed USDA average cropland asset values. The dark orange line is the line of best fit that represents the forecasted rate of increase based on the observed USDA values. The light orange lines represent the lowest and highest cropland asset values will go, based on a 95% confidence interval. Based on a regression model, it is likely that farmland asset values will increase to $8,856/ acre (up by $256 / acre).
Cropland asset values soared in Delaware from 2004 to 2007. The interest rate during that time frame was between 1% and 4.25% with the highest rate target set at 5.25%. From 2007 to 2008, during the recession, the Fed decreased interest rates to a target of 0%. Delaware farmland average asset values tumbled during this time frame and continued to fall until 2010. Even with the Fed increasing the rate target to 0.75-1%, it should be noted that there are different sets of protocols for lending in place currently, than during 2004 to 2007. A massive increase in housing development in Delaware during this time frame that spurred farmland asset values to spike, is unlikely to be seen. The price and demand for farmland will remain strong, however the Fed rate hikes should not be the major driver in changes in farmland asset values.