The price of farmland in Illinois has soared in recent decades. That is changing.
“The feel of the market is noticeably different than the euphoria of 2021 and 2022. This has led to some cautiousness and patience from sellers and buyers alike,” said the 2024 Illinois Land Values and Lease Trends Report from the Illinois Society of Professional Farm Managers and Rural Appraisers (ISPFMRA).
As of last year, the average price of high-quality agricultural land in the region that includes McLean, Livingston, Tazewell, and Woodford counties had grown more than four-fold over two decades. It was still rapidly accelerating as late as 2021 and 2022.
The average price for the region was more than $16,000 per acre for high quality land. Ten years ago, it was $12,000 for the region; 20 years ago, it was just under $4,000 for the region.
High prices continued last year with a couple of sales in Tazewell County that approached a whopping $23,000 an acre and one in McLean County came in at $20,000 per acre.
Statewide averages over each period were marginally higher than for the region. Overall land values were still up across the state last year, but the report showed some declines in the price of high-quality farmland in northeastern Illinois and the region around Decatur. That variability hadn’t happened in some years, said the society.
Ag bankers and farm auctioneers have seen prices plateau in the first six months of this year in their business.
“We try to keep track of the arms-length transactions, public sales mainly in the northern two-thirds of the state of Illinois, which is our major footprint area, basically north of Interstate 70. The market has shown us land prices are down about 3%,” said Dave Klein, managing broker of the management and farm real estate firm First Mid Ag Services.
Klein said most agree there are single-digit price decreases across the Midwest.
McLean County is somewhat insulated from this drop. Farm auctioneer Don Meyer credited the last glacial age for the fertile topsoil that makes it easy to grow crops.
“The soils in McLean County are probably among the best. The highest score you can get for soils, it’s called a productivity index, is a 147. And we have a lot of farms in McLean County that average a 140, 143. That’s a really strong average,” said Meyer.
Meyer said you can see and tell the difference between great soil and lesser ground.
“I’ve walked those farms, and they feel good even walking on them. It just has a nice tilth to it, nice, soft, not a lot of clay. It just has a nice feel to it when you walk across it. It looks good, feels good, and farms very well,” said Meyer.
Several factors contributed to the years of price runups. Kevin Birlingmair, senior vice president of Heartland Bank and Trust Company, who heads the agriculture realty division of the bank, said one of the drivers was institutional investors.
“People were pulling money out of the stock market. Investors, people who had a lot of money in the stock market, thought the stock market’s doing pretty well here. I’m going to harvest some of my profits and put it in farmland as a hedge against inflation, which they did. So, there were all kinds of buyers and that just really ramped that up along with the price of corn and soybeans going up,” said Birlingmair.
Current conditions
But the price of commodities has now dipped substantially.
“Two years ago, corn was over $7 a bushel or right around there, and now it’s not quite half of what it was. Cash flows are tight. Farmers were making really good money two years ago and now in some cases it’s a struggle to break even,” said Birlingmair.
Meanwhile, fertilizer and other input costs have gone up a lot. And greater global competition may keep corn and bean prices down for a while. Birlingmair said there is a lot of supply and not as much demand.
“South America continues to expand their ag operations. They continue to clear off acres in the rain forest. In Brazil the government just agreed to spend an extra $71 billion on infrastructure. Since 2018 the amount of soybeans grown in south America has doubled,” said Birlingmair.
There had been a market for soybeans for biodiesel fuel. Part of that market has disappeared now that China has ramped up recycling of fryer oil into biodiesel, said Birlingmair. On the corn side, he said, even the market to supply feeder cattle has tempered.
In the 1990s and early 2000s one of the forces driving farmland prices upward was explosive development in the Chicago suburbs. Farmers would sell their land at a premium for housing or business development, as cities encroached into agricultural areas. The federal government allows owners to avoid capital gains taxes on the sale if the sellers turn around and buy new farmland within a short time.
Since they were selling by the square foot and buying by the acre and had only a 45-day window to complete the transaction, those flush with development cash would sometimes turn to land for sale in Central Illinois and outbid potential local buyers. They could also afford to buy more acreage than they had earlier.
Birlingmair said there is still some 10-31 money (named for the federal code that allows such turnaround sales and purchases) but not as much in Central Illinois. Birlingmair said he has seen more 10-31 investors in Ohio, Michigan, and Georgia.
High interest rates can cut both ways in affecting farmland prices. Higher rates and low operating income may make it less possible for farmers to expand their holdings. Yet, the high rates might also make some owners more willing to sell.
“We could see more land coming to the market this fall. There are some folks that maybe are even leveraged a little bit that might say I’d be willing to sell a piece or two if I could rent it back, if you could find me a landowner. That would reduce my debt load and improve my balance sheet and give me a little more working capital,” said Klein.
Working capital is more important than usual just now because interest rates are up not only for land purchases but for the operating notes that allow farmers to buy seed and fertilizer. Debt service to put in a crop is a lot more than it was three or four years ago, said Klein. He cautioned this is not a major market force. It’s affecting mainly the farmers who have bought land in the last five years, he said.
“While the spigot hasn’t shut off, the speed at which sales are happening is slowing,” said the ISPFMRA report. “For much of 2021 and 2022, the land industry moved at a breakneck pace in auctions and private transactions. We were spoiled in a sense, in that there seemed to be a Class A land auction on a weekly basis. That changed dramatically in 2023. The velocity of closed transactions slowed considerably.”
Birlingmair said the situation is kind of like a wedding reception. Sometimes you have a full house. Other times, people haven’t RSVP'd and you’re left nervously hoping they show up because there is all this food on the table.
“There’s just a lot less hands in the air at an auction than there were three or four years ago, even two years ago,” said Birlingmair.
That’s not to say there are no buyers.
“It just depends on who the neighbors are when you have a sale. If somebody has driven past that farm for 50 years or 60 years or they own the piece next to it and they’re going to have one chance in their lifetime to buy it, they’ll make a really strong effort to buy it,” said Birlingmair.
The auction system
Auctioneer Don Meyer said the most important bidder is the backup bidder. And even late last year, Meyer said he had seen some auctions fail to gel.
“If there is no competition, then the auction stops. ... You always want to make sure you have two or three bidders if you can recruit them,” said Meyer.
What happens if an auction doesn’t go?
“Generally, what you do is ask what’s it take to buy the land? And as an auctioneer you would say we’re going to have to have an offer above a certain level and if they are in agreement then it is done. I’ve had those happen before when you sell it the same day but quietly after the auction,” said Meyer.
That may mean the price is lower than hoped, contributing to the modest drop this year.
“Even though prices show to be relatively stable, there were a few auctions that ended in 'No-Sales.' This reinforced the conclusion made by our committee that the land markets were very localized for 2023,” said the ISPFMRA report on region four which includes McLean, Livingston, Woodford, and Tazewell counties.
Birlingmair said that modest dip in land prices in the first half of 2024 may deepen.
“Most farm leases will get renegotiated here later this fall. And cash rent prices, obviously, will have to come down some. And as they come down that’s less of a return on the investment the investors get. So, you might see a little dip in farmland, but farmland in my opinion has actually held up better than I guess I thought it would have,” said Birlingmair.
Farmland as an asset class
Annual returns on farm ground are low compared to the stock market, but Birlingmair said that’s deceiving.
“Farmland is like gold with a dividend. You get appreciation from farmland. If you look over the last 50 years farmland has historically appreciated about 6% a year. You get that appreciation. Plus, you get the dividend, which is going to be the cash return on the farmland,” said Birlingmair.
If you look at appreciation and income, he said the annual return is about 8%, which is comparable to many stock market instruments.
In fact, farmland prices have tracked closely with inflation over several decades. And that hedge against inflation tends to prop up sale prices.
“That is something that larger investors look at very closely. When you talk about institutional investors, if they are looking to acquire farmland, one reason could be just diversification of a portfolio to make sure they’ve got some land because historically it has shown that it makes sense to participate in the farmland market,” said Klein.
Another hedge against falling sale prices is scarcity. The number of sellers has gone down a little but not as much as you might expect. You’d think the number of sellers would also fall if the price is not likely to rise. Why wouldn’t potential sellers sit for a spell till things get better? Answer, in the case of estate taxes maybe they can’t or don’t want to.
“Most of the farms being sold are being sold by estates. When grandma and grandpa pass away and the kids inherit and one is in Connecticut and one is in California and they don’t want to own the farm any more, it doesn’t matter what the prices of corn and soybeans are. It’s time to sell it,” said Birlingmair.
Klein thinks farmland will stay attractive to institutional investors, such as real estate firms and pension funds. More so if inflation shows signs of being "stickier." Historically, he said farmland prices are closely tied to inflation because it’s tightly held.
“With just the scarcity and utility of it and the fact that when you have several people chasing something that is very limited in supply, inflation occurs. We only sell 1-2% of farmland in any given year,” said Klein.
That scarcity can drive bidding higher because next door neighbors or the farmer who leases the land are often highly motivated buyers.
“Our family stuff we own has been in our family since 1866. It hasn’t been for sale since then. A lot of the stuff has been in the same family for a long time, and it has just not changed hands. So, when it does change hands, if you want to buy it, you have to jump on it,” said Birlingmair.
Another attractive part of farmland is that it is in general less leveraged than other investment instruments, said Klein, so you don’t have a lot of forced sales (except for estates).
Value-added effects
Wind
The Illinois Society of Professional Farm Managers and Rural Appraisers noted a couple sales in Central Illinois last year involved land with wind turbines included. Wind and solar raise the per acre price and play into overall averages.
“Land is worth what it can earn to a certain extent. Whether it’s a wind farm or a solar panel or a corn plant, that kind of determines what the value is today and maybe the projected value of what it might be worth tomorrow,” said Klein.
Wind turbines can boost the per acre price by a couple thousand dollars (in one case last year), but it really depends on the value of the contract with the wind company. Klein said that the size of the turbine and the age of it also matter.
“It has a lot to do with what the payment is on that tower and how many acres you are selling by the tract. Those contracts vary from $7,000-$8,000 per turbine up to $34,000. It varies on where you are at,” said Klein.
Another salient factor is the age of wind farms. The oldest wind farms in McLean County for instance may have 12-20 years left. Those leases could be extended. If they aren’t that could diminish the prospective prices of particular farms. Klein does not think that is likely.
“What history has shown me from other projects that have matured and they have what they call ‘repowered them’ is they may consolidate. The turbines directly east of Bloomington are 1.67 megawatt turbines. The turbines north of Colfax are 3.4 megawatt turbines. If you had to replace a turbine you would replace it with something that’s more powerful. They may be able to use the same pole structure. If they can, they can’t put them that close together because of the engineering and the blade size of the 3.4 megawatt turbine. You may see every third turbine doesn’t get replaced,” said Klein.
That could affect individual landowners’ income streams but the money is paid on a per megawatt structure so the overall amount of money won’t go down it will just be re-allocated. And the broad effect on land prices would be at the very least neutral.
Solar
“The MISO (Midcontinent Independent System Operator) grid is adding capacity with a power line upgrade that will have a significant impact for the future solar and wind projects,” said the ISPFMRA report.
Solar is starting to take off. And that has potential to boost land prices, though Klein said how much is uncertain because options and plans may not translate directly to solar panels on the ground.
“I will put an asterisk beside all that and say I’ve had some solar developers say only about 28% of any project is going to get developed,” said Klein.
Other difficulties in assessing the impact of solar on average farm prices include distance from a substation, the ability to have a three-phase line, zoning requirements, and sometimes proximity to existing residential development, said Klein.
Yet even those few who can have wind or solar on their farms can have a broader market effect on sale price averages.
“Because typically what happens is the people that may put some land into a solar project. They are typically landowners not just land holders and so they maybe take those proceeds and go look for another piece of land. So that just increases demand,” said Klein.
CO2 pumping
Carbon sequestration leases began to be recorded in eastern McLean County last year.
“There is not much known about how this will affect land values and they are all in the development term of the lease still. In any case, it seems safe to conclude that the 'green energy' movement has affected the landowners’ bottom line in a positive way,” said the managers and appraisers’ association report.
Future influences on farmland values
Farmers are moving to adopt automated techniques. A combine or sprayer may not have a human driver now in some test cases. That could become standard practice in the not-so-distant future.
“That may provide for some labor efficiencies which may allow us to have some additional extraction of income. I think that would probably be a positive factor,” said Klein.
Usually, machines are cheaper than human beings over time said Klein.
International investment
Despite media accounts in some states about ag investments from China, Klein and Birlingmair did not expect foreign capital to have a significant effect on farmland values. Klein said he has not seen any systematic Chinese investment in central Illinois farmland.
They expected some investment, mainly from Europe, the U.K. or Germany, where there are historical ties to families that settled in McLean County.
Some media accounts have noted foreign ownership by debt instrument records from a Portuguese company. Klein said that’s misleading because all the company actually owns is the wind turbines on two of the big wind farm projects in McLean County. That is not the land itself. It is the turbine that sits on top of an easement for the land owned by someone else.
Ethanol
Farmers tend to worry about pressure on the corn market as electric vehicle conversion takes hold in the auto industry and demand for ethanol additives to gas diminishes. Klein said he’s been talking about this challenge for the last five years, but it’s unclear how soon it will materialize or to what degree.
“It’s going to be harder. There are some things that can be done with CO2 capture and credits of that nature,” said Klein. “That’s a political hot button. And I’ve got my own reservations about that, but we’ve got an ethanol plant at Gibson City and we’ve got the soil that can do that (bedrock formations under which CO2 can be sequestered).
Particularly, if potential sellers have gotten an appraisal in the last year at all-time highs, they should be prepared for softening land prices, said Dave Klein. But nobody consulted for this story expected broad long-term declines in the value of central Illinois farm ground.
