In Conversation: Key Findings from the Heartland Report

In this conversation, our director of data science, Dr. Aaron Shew, and VP of business development, Ben Maddox, break down key findings in the recently released Farmland Values: The Heartland Report (available here). This report leverages actual transaction data to offer insights on farmland value trends between Q1 of 2022 and Q2 of 2023.

While most land value reports rely on surveys, the Heartland Report's real transaction data provides a more reliable understanding of trends in Midwest farmland values. This comprehensive report zeroes in on the Midwest Corn Belt region and spans 8 states.

During this discussion, Aaron and Ben highlight key factors impacting farmland values and seasonal variations in the market. You can watch the full video or check out key takeaways below.

Key Takeaways

What makes the Heartland Report unique?

Aaron Shew: Most of the reports I've read on land values historically have been primarily based on survey data. So survey data is useful. It's often the only thing available.

But it's really exciting to release a report based purely on actual observed transactions over a multi-year period. So, from my perspective, that's what I'm most excited about in this report is that we can look at these regional trends and price on a productivity basis and understand the trajectory of farmland values over time.

Ben Maddox: I think the first thing on the top of everyone's mind is where are land values going, right?

It's been an incredible couple of years with great gains in the farmland market in general, but the most important thing to remember is that the farmland story is different throughout the entire United States. You can't really compare what's happening in Iowa to what might be happening in California in sort of an apples to apples comparison.

So we need to take care to break out these subregions and really evaluate. What is driving value in each one of these places that's unique to that place? And so why I'm excited about the Heartland report is that this is our look at what might be called kind of the Corn Belt, the I-states, plus a few more, really that center of the United States.

What data is the Heartland report based on?

Aaron Shew: We included over 37,000 unique farmland transactions in this report. [...] We began in 2020 and came all the way through Q2 of this year in 2023. And those cover every crop reporting district across eight states, including, like you said, the I-States, but we also have Minnesota, Wisconsin, Ohio, Nebraska, and Northern Missouri. So a really large swath of the Corn Belt.

We captured great transactions on a quarterly basis over that time. So you'll occasionally find a few reports where there are sales-based analyses within a single state or within a particular region. It's rare, maybe if ever, that there's been a report with this sort of comprehensive look across the region, across states, and across crop reporting districts. 

I think that's really the huge value add we bring to the table, because I just don't know of any other databases where you have more than 30,000 transactions that also include productivity indices and tillable acreage, for example. It's really hard to get that kind of breakdown in the way that we do.

What’s driving farmland values?

Aaron Shew: Just based on the market fundamentals—we're not getting more farmland. In fact, we're decreasing the amount of farmland and at a high level demand is going up. There's more people in the world. There's more demand for food, feed, and fiber.

We expect to see long-term appreciation. Now then, when we zoom in on this report from 2020 to present, we see some pretty strong positive trends in appreciation, particularly at the turn of 2021, the end of ‘21, and the beginning of 2022. A lot of farmland turning over, a lot of strong pricing seen in the market.

And then moving into late ‘22, we saw kind of a softening. I wouldn't say a decrease in farmland values, but we see a softening of that market as interest rates rose, and interest rates then affect farmland or farm income balance sheets coming into 2023.

But what I really like to see in our charts is this: you can really pick out the seasonality. So just like ag production, farmers are busy in Q2 and Q3, so you often see just less transactions, lower transactions, people are only selling if they absolutely have to, whereas Q4 and Q1 each year, we see sales really pick up in terms of volume and pricing.

Ben Maddox: Yeah, I think what I keep hearing in the market, Aaron, is a kind of softening, kind of like a plateau is maybe another way to think about it. We reached these historic highs on land values throughout the Heartland over the last couple of years, and we're not seeing losses of that or a degradation of those gains, but really just kind of a plateau.

And to your point, lots of folks, you know, are sort of hypothesizing interest rates play a role. They probably do. But it's important to remember that farmers are still the largest buyers of farmland. They've had, along with these high farmland values, some really good net income years.

If you look at farm net income over the last couple of years, it's been really strong. And so there are some sort of positive long-term, let's call them demand side things at play in terms of global demand for grain, fuel, fiber, that kind of thing.

But yeah, certainly I think there are some headwinds when it comes to interest rates, and maybe we're coming down a little bit from the net farm income we saw over the last two years but still positive territory, still positive from a historical standpoint when we think about inflation adjusted net farm income over time.

What are the differences in trajectory of values based on soil quality and productivity?

Aaron Shew: I think there's quite a bit of variation across states with respect to that. So in general, if I pick the highlights, what I'd say is that Class A ground saw the steepest growth from 2020 through 2022, but it was kind of the first to soften. It was the first to plateau, as you put it. Still overall gains.

But it's often whereas the class B ground tended to continue its growth trajectory. Class C is variable across states where certainly in some states it continues to increase. In other states, it also plateaued early like class A ground. But in general, I'd say class B ground has been has seen the least effect from market softening coming into 2023.

Ben Maddox: That's fascinating. And that generally held up across most of the states you looked at in the Heartland report.

Aaron Shew: That's correct. Most of the states in the Heartland report would look that way. Some of the differences are going to be looking at Iowa Class A ground. We saw really incredible sales, you know, even at the $30,000 per acre mark in 2022. So coming into summer of 2022, Q2, Q3, the Iowa Class A ground hit that softening or plateaued earlier than other states. Sort of a signal of where things were going to go.

As we moved into Q4 and Q1 of this year, places like Minnesota also saw that decline or plateau in Class A ground, but didn't see that for another six or nine months lagging Iowa. Same in Illinois PI.

Ben Maddox: It's kind of fascinating in the Midwest or the heartland, it seems to be that the highest quality ground and the highest quality states tend to kind of be on the front edge of these trends that we see, right? So whether it's a run up or whether it's a plateau or a decline, they always seem to be kind of on the leading edge when you look at what's happening in the highest quality ground right now.

Aaron Shew: That's right. I think the other thing we're seeing though is a shift where a lot of people have used Iowa as the benchmark for the best ground, particularly Northwest Iowa. That's where those really high end sales have occurred.

I think as we've moved into ‘23, we've seen Illinois take a lot of the cake there, particularly Central Illinois has seen some really strong sales. So we're seeing even price per tillable acre for Class A and Class B ground in Illinois kind of outpace what we've seen in Iowa. Not that it hasn't softened, but it's been a really strong state in terms of increases or appreciation in farmland values.

What makes farmland values so nuanced?

Ben Maddox: Farmland is not a homogenous asset class. If you take a look at some other real estate class, like, say, single family housing. If you've got a three bedroom, two bath house right next to another three bedroom, two bath house built the same year by the same builder, you can infer a lot of things about the value of one by looking at the other.

That's not really true in farmland. You get maybe as close as possible to that in some parts of the Heartland where farms look fairly similar, but a lot can be deceiving.

Is that farm tiled? Does it perhaps have irrigation if it's in a river bottom or maybe western Nebraska? If it's in Nebraska, what natural resource district is it in? There's all kinds of things that you can begin asking questions about that are going to tell you something about farmland value that's not obvious, perhaps, from the naked eye.

And so what I always like to say is that you cannot easily make decisions about value on a property without having some expertise. It could be your own personal expertise. Oftentimes, it means turning to a local real estate agent, a local appraiser, farm manager, whatever it might be, to help walk you through that valuation process and uncover some of those, we'll call them idiosyncrasies. 

I think one interesting way that we tackle that at Acres is making sure that we can drive all the way down into the individual transaction level, right? So the Heartland Report is great because it summarizes, as you said, over 37,000 transactions over the last few years.

It gives you this great 10,000 foot view of what's going on in the market. But one of the advantages is we do have the ability through our data platform, Acres, to actually drive into each one of these transactions. So again, we're summarizing them at the high level for the report, but you can go take a look at every single transaction that was involved in the report through the Acres platform.