Ray Brownfield, designated managing broker/owner of Land Pro LLC, reported some recent farmland sale prices in Illinois that made many gasp at the group’s annual fall seminar in Morris.

But, with some sales of high productivity land reaching $14,000 to $16,000-plus per acre around the state, a sale in Iowa that recently exceeded $20,000 per acre and a record average price ($9,785 per acre) this year in Indiana, according to Purdue University’s annual farmland survey, some might be wondering if the bottom could fall out of the market.

“This is going to be one of the highest yearly increases in farmland values in history,” Gary Schnitkey, University of Illinois professor of farm management and Soybean Industry Chair in Ag Strategy, said at the Land Pro event.

The Illinois Society of Professional Farm Managers and Rural Appraisers’ mid-year survey recently estimated values of professionally managed land in the state increased 20% the first half of 2021.

But Schnitkey doesn’t foresee a major crash in the market any time soon. And it doesn’t appear the market is in a bubble as farmland values are driven by farm returns and interest rates, which are supportive, among other factors.

“Going back through history, there wasn’t a crash (in farmland values) following other high increase years,” said Schnitkey, who noted Illinois farmland values were overvalued during the high interest rate era in the 1980s.

In fact, U of I models suggest farmland prices haven’t gone up high enough in some areas recently to adjust for low interest rates when compared to capitalized values.

“It’s not showing a problem (with higher farmland prices),” Schnitkey said of the model.

What’s driving the inflation in farmland values?

“It’s multi-fold. I call this the perfect storm for land values,” said Brownfield, who’s worked in the business for 55 years.

There’s currently not enough land on the market to meet demand, new funds are entering the market, strong commodity prices continue to incentivize farmers to invest in land, investors view farmland as a hedge against inflation and low interest rates continue to lend support, according to Brownfield.

“What I see is new money coming in, which I’ve never seen at this level,” he said. “Why? Because they see land as a good, long-term investment. How long will it last? I think we’re in it for awhile.”

Cash rental rates under pressure

The combination of profitable farm return estimates across much of the state and strong returns from land continue to pressure cash rental rates.

Schnitkey generally foresees higher rates for 2022, but cautions against bidding too high as farm income could decline next year due in part to higher input costs and the possibility of lower commodity prices and ad hoc disaster payments.

“We’re setting cash rents now through the remainder of the year. They could go up,” he said. “The issue is we’re really raising breakeven levels.”

Farmers and landowners should work toward setting rates that are fair for both parties, which could include a flexible lease arrangement that adjusts for commodity price swings.

Cash rent negotiations are particularly critical in Illinois as the state leads the nation in the portion of farmland cash rented (50%), followed by Indiana (45%), Iowa (41%) and Ohio (37%). In northern Illinois, the portion of cash rented ground is even higher at nearly 60%.

“There is a range of cash rents related to (soil) productivity,” Schnitkey said.

USDA reported this month average cash rental rates by county ranged from $52 to $311 per acre across Illinois this year.