Agricultural land in the Upper Midwest has experienced substantial appreciation over the past several decades, with the recent years standing out. This includes cropland, rural homesteads, recreational land and livestock operations. Several factors have contributed to this trend, including record-setting yields, historically low interest rates from the late 2000s until 2022, favorable commodity prices, limited available land and non-production agricultural investors. As we move into the second half of 2024, many of these areas have leveled off.
Cropland Trends
Many counties witnessed record-high land prices toward the end of 2022 and into the middle of 2023. Since then, the market appears to have hit a plateau. At this point, there is no market evidence of any major contractions in value. At the same time, we are generally not witnessing new record highs. The market can be characterized as stable.
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Higher quality land continues to be more attractive to buyers. The reduced supply of land available for sale has offset increased interest rates, which historically would put negative pressure on values. With reduced commodity prices, most cash grain operations are looking at lowered profitability outlooks for the current crop year. However, the swing has not been adverse enough to result in losses yet in most cases. A certain degree of belt-tightening is starting to occur, contributing to the plateau in land values.
While land prices remain stable thus far into 2024, there’s a possibility of a slight weakening later in the year or into 2025. Various factors, including trade barriers, present challenges to the agricultural economy and land values. Nonetheless, the current market still sees robust sales.
Dairy Farm Sale Trends
Both Minnesota and Wisconsin have strong dairy industries, which have driven demand. The dairy industry in both states has trended along with what is being seen nationally. Similar to swine, facility valuations remain challenging on smaller units, many of which are no longer selling as operating dairy farms.
Some producers have looked to expand their operation or exit the industry. When exiting the dairy industry, a common trend has been to repurpose facilities for beef feedlots. For those farms that continue as operating dairies, the situation varies by region, but we have seen some 300-400 head dairies change ownership, with fewer under that threshold. Larger, modern units have seen stronger value over last few years due to an increase in new construction costs and probability in the industry, leading to strong demand.
High prices led to strong profitability in 2022 but tempered somewhat by labor challenges, higher feed costs and high building costs. Investments in automation and robotics to help solve labor challenges continue to be prevalent across the industry.
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Similar to trends seen in cropland, the following are some sale trends related to dairy farms:
- Economic Conditions: Fluctuations in milk prices impact the farm’s profitability, thereby influencing land values. Higher milk prices generally support higher land values as profitability improves.
- Interest Rates: Low interest rates have made financing more affordable, supporting higher land values. Conversely, higher interest rates can put downward pressure on land values.
- Demand for Sustainable Practices: There is growing interest in sustainability. Farms employing sustainable practices may see increased demand and higher values especially if the end-consumer is willing to pay more for their product.
- Technological Advancements: Adoption of new technologies in dairy farming can enhance farm efficiency and profitability, potentially increasing land values.
How Trends Affect Dairy Farm Appraisals
The sale of cropland and dairy farms can significantly impact the appraised values of similar properties in the surrounding area. We have seen the same farms appraise for notably higher the last few years because of the trends identified above and other factors including:
- Comparable Sales: Appraisers often use recent sales of comparable properties (known as comps) to help determine the appraised value of a property. If cropland or dairy farms in the area have recently sold for high prices, this can increase the appraised values of other similar properties nearby. A series of high or low sales prices can signal an upward or downward trend in appraised values.
- Supply and Demand: If there is limited cropland or dairy farm availability and high demand, the value of existing properties may rise.
- Economic Factors: Commodity prices and interest rates
- Soil Quality and Productivity: High-quality, productive land will typically have a higher appraised value. Recent sales of such land can help set benchmarks for appraisers.
- Improvements and Infrastructure:
- Farm Infrastructure: The presence of modern buildings, equipment and irrigation systems can increase the value of a dairy farm and cropland. The higher construction costs since COVID-19 have been affecting appraised values for improvements, many times increasing the values because of the increased cost to build.
- Recent Investments: Sales involving properties with recent investments in infrastructure typically set higher benchmarks for appraised values as they reflect recent building costs.
- Proximity to Markets: Farms closer to processing facilities, markets or transportation hubs may have higher value due to reduced transportation costs.
The sales of cropland and dairy farms provide critical data points for appraisers, influencing the appraised values of similar properties. These dairy farm appraisals influence producers’ financials, often increasing equity positions.
As a lender, we recommend periodically appraising the farm. An appraisal may be necessary for a land sale or purchase, and a lender may require it for financing. It may also be beneficial to have an updated appraisal for succession and tax planning, to help understand the farm’s value for equitable distribution among heirs and to determine estate taxes to minimize tax liabilities.
Additionally, it can be helpful to have an updated appraisal for insurance purposes. Knowing the true value of a farm is critical for obtaining appropriate insurance coverage, especially with increased building costs since COVID-19.
In summary, the most likely outlook at this time is for markets to remain stable and for the agricultural land value plateau to continue. Higher quality cropland continues to attract interest, and that trend will likely persist in the near future. Pockets of concentrated crop and livestock diversity, along with a significant processing base throughout the region, continue to provide overall stability to farmland in the regions across the Upper Midwest.
