Growth in US farmland prices slowed over the summer, and is expected to keep cooling as higher interest rates and input costs state to bite, central bank surveys showed.

Prices of “good” farmland grew by 20% year on year in the heart of the Corn Belt in the July-to-September quarter, while in the central Plains, including the top wheat-growing state of Kansas, values of benchmark irrigated land expanded by 17.9%, Federal Reserve data revealed.

However, these figures represented decelerations from growth reported in the previous quarter, and indeed were in both cases the lowest figures in a year.

“The pace of growth has moderated following steep acceleration in 2021,” said the Fed’s Kansas City bank, which covers the central Plains.

Declining expectations

The bank reported reduced expectations for price growth ahead too, with the proportion of lenders surveyed expecting year-on-year price growth in the following quarter falling to 30%, from some 50% three months ago.

“Additional growth in farmland values and cash rents was still anticipated in the coming months, but the expected pace of increase continued to moderate.”

In the Corn Belt, the 68% of lenders surveyed by the Fed’s Chicago bank forecast prices holding flat for the October-to-December quarter, compared with 25% foreseeing an increase.

‘Significant negative effect’

The easing back in price growth reflected raised borrowing costs, the Kansas Fed said, noting that borrowing costs had risen “rapidly” – by 0.75 points quarter on quarter for variable rate loans – to lift farmers’ financing costs to their highest in three years.

“As interest rates increased, growth in farm real estate values showed more signs of softening,” the bank said, highlighting lenders’ comments that “higher interest rates have had a direct impact on farm borrowers”.

Banks in Oklahoma “noticed the most pronounced impact, with about a third reporting a significant negative effect”.

Rising costs

At the Chicago Fed, policy advisor David Oppedahl reported that “a few of the bankers we surveyed responded that they saw some decrease in the interest in farmland due to rising interest rates”.

He also noted the test for farm profitability from costs of inputs, such as chemicals and fertilizers, which have been “up pretty dramatically”.

“That’s creating a bit of pressure on the margins for agricultural producers,” he said, noting too some hit to farm takings from the low Mississippi River levels which, in limiting barge traffic to Gulf ports, is leaving crop backing-up in the Corn Belt, so weighing on local prices.

“Because the barges can’t move as fully loaded and they can’t have as many, then that’s creating lower prices for farmers.”

‘It will not be pretty’

Mr Oppedahl reported an Indiana lender cautioning that, with input costs high, “if commodity prices begin to fall, it will not be pretty.

“We still have good equity on most farms, but that can dissipate quickly,” the banker said.

However, Mr Oppedahl flagged “momentum” in land price increases nonetheless, “even if there’s a slight trailing off from the very fast rates of increase that we’ve seen in the past year”.

Corn Belt farm incomes were “still robust”, buoyed by what “turned out to be another strong production year” in terms of corn and soybean yields, and with prices above year-ago levels.