In an effort to combat high inflation, the Federal Reserve has raised interest rates – again.
As of July 27, federal interest rates are now set to a range of 2.25% to 2.5%, which is much higher than their near-zero setting at the start of 2022 but still probably low enough to stoke the economy, according to the New York Times.
How will these measures affect farmland values? Traditionally, lower interest rates go hand in hand with increased demand for farm loans due to lower interest payments. The increase in demand spurs the price of land to rise.
For a number of years, farmland prices have experienced sharp gains. Kansas and Iowa saw the largest average increase in land valuations in the country over the past year, at 29% and 28% respectively.
According to Dr. Wendong Zhang, an assistant professor at Cornell University’s Dyson School of Applied Economics and Management, this recent surge is supported by substantially higher commodity prices, low interest rates, stronger than expected crop yields, strong demand, including from investors, and limited land supply.
He cautioned we are about to see that the opposite holds true when interest rates rise. Zhang predicted that farmland values will likely see movement in a new direction in the later part of this year.
“Land value could be thought of as income divided by interest rates, and the interest rate hikes by the Federal Reserve put downward pressure on the farmland market,” Zhang said. “The recent swift Fed measures start to dominate the prior cuts from 2015 to 2020, and the farmland market likely will feel the downward pressure starting late 2022 or early 2023.”
Regarding the end of July bump, he added, “The larger-magnitude interest rate hikes by the Federal Reserve certainly will exert more downward pressure on the farmland market, which already shows signs of leveling off.”
The effect of one monetary policy move can take multiple years to be fully capitalized in the land market. The peak effects of these projected federal fund rate increases will likely be felt most in 2024 and 2025.
by Enrico Villamaino