What Makes Land An Attractive Investment: A Chat About Land Values with Matt Erickson from Terrain

Today we have a special episode featuring a conversation with Matt Erickson, senior analyst with Terrain. We talk about land values, including what goes into setting the market, why land values can be a good investment, and what to consider if you're looking to buy or rent land. 

Transcript

SPEAKER_01 0:14

Today, Monday, July 13th, 26th. Everybody had a great weekend. We're going to talk 45 rain. And we're going to talk a lot about land values. What goes into pricing? What to consider if you're looking to buy or sell land and what kind of returns and ROI we can expect. So hope you enjoy the conversation. Here it is.

SPEAKER_00 1:07

Yeah. Overall, I think the report really came about when I was talking with our farm credit customers and a lot of questions I got, you know, were you know basically, you know, what if total returns look like when you take the whole big picture across the Midwest and some of the plain states that we serve? And, you know, really it the report just did that. You know, it examined, you know, how crop, you know, cropland has earned its return over kind of the 35-year period between 1990 and 2025. So it does incorporate different ag cycles and and different business cycles during that time period. And, you know, I think from a high level, and again, this report comes from a high level. It really doesn't kind of dive down into some of the nitty-gritty in terms of, you know, what kind of generates those, um, you know, what makes up those two sources. But really, when we think about farmland, it does come from two sources uh with regard to returns. One is the cash income that is generated from the farm ground, and then two is the land appreciation that can come from the farm ground as well. So when we looked at the 10 state, you know, kind of uh um sample with regard to the Midwest and some of the plain states, you know, one, I think it's important that we, you know, kind of bucket this into two categories. One is the nominal return. And if you look at the range of nominal returns, you know, through different ag cycles and through different business cycles during that 35-year time period, roughly you have between 9 and 17% annually on average. But then when you take inflation-adjusted returns, you're looking at between 4% and 12% with regard to real uh inflation-adjusted returns. So you look at you know, states like Kansas and South Dakota, you know, part of that, you know, 35-year mix, you had more of the larger share of returns coming through income. You know, states such as your I states, you know, Illinois, Indiana, Iowa, and then Ohio, the eastern uh portion of the Corn Belt that I looked at really was more heavily on the appreciation side of uh the coin there. So really kind of just looked at how those two behaved during the 35-year time period.

SPEAKER_01 3:10

So um when whenever we hear conversations about land values, it's always about, oh, did you hear about that piece of land that sold for $40,000 an acre or whatever it was? Um obviously those are auction prices, and it takes two people who really want a piece of land bad for prices to jump up. But how does this correlate with some of the higher prices we're seeing? And we continue to see for farmland that's an auction and also kind of this increase in rental values, too.

SPEAKER_00 3:42

Yeah, that's a really good question. I think first and foremost, how it correlates is the fact that demand for high quality farm ground still remains strong, and it has for quite some time. And you think about you know, weaker commodity prices, we're kind of in this third year of uh what they call you know, kind of a farm downturn in the farm economy. But you know, when we do look at farm income, you know, some of that farm income has been propped up by you know strong cattle prices as well as government programs. But getting back to the demand, you know, side of this, you know, one, I think you've got you know things like renewable energy that are creating, you know, additional demand for um that good quality uh piece of farm ground. Obviously, data centers has been a big topic of conversation across the country there. But I think when you look at farmers, you look at investors, you look at any buyer of that farm ground, and basically they they're valuing that land based on a couple things. And one, it's you know, long-term income potential for that farm ground. Second, is kind of the old adage of you know, farm ground being an inflation hedge, uh serving as an inflation hedge hedge. So it is there is some inflation protection that farm ground has historically and currently does provide. Uh, there's scarce land supply. We're not making more of it. Uh more is being taken out than being made. But then also, too, from that investor uh side of things, either from a farmer's perspective or just a plain investor, there are some portfolio diversification benefits uh that farm ground does provide. So I do think when we look at you know farm ground, I do think the the correlation there between what we're seeing now with some of these auction values and you know, kind of that correlation there, you know, I think the demand for that high quality farm ground still remains in today's market.

SPEAKER_01 5:26

So really there's demand comes from a lot of different places, then it's not just the neighbor wanting that land. It could be somebody who's a long ways away who's wanting that land.

SPEAKER_00 5:36

Absolutely. And you know, when in for me as a farmer here in in northwest Indiana, you know, I think we look at land or land values in kind of two buckets. One is the actual farm, the farm land value itself. And then second is the rental uh price or the cash rent price that a farmer may pay. And I look at, you know, this year as well as next year, and why I think it's important to kind of note this as part of the agriculture cycle is oftentimes when we see kind of a run-up in the agricultural cycle, land values really outpace in terms of appreciation than that of, let's say, the price a farmer pays for cash rent. So again, you know, when you look at the income, you know, kind of um yield side of farm ground, obviously right now with the the past act cycle uh going upward, now we're kind of coming down. Uh the the 10 year, if you take a look at the 10-year and you look at you know where cropland sits within, or when you compare against that 10-year uh yield, it is serving as a little bit of a premium compared to that 10-year treasury yield that we're seeing today. So again, when I look at cash rents as uh as well, you know, one, I think oftentimes cash rents are sticky uh when it comes to the overall kind of landscape of cash rents. And oftentimes, you know, cash rent structure doesn't necessarily look at one year of profitability. It looks at a couple years worth of profitability. And when we see historical trends, sometimes you do see cash rents staying sticky, but then maybe sometimes uh declining here uh rather just a little bit modestly here over the over the next two to three years when you do have a downturn in the ag economy.

SPEAKER_01 7:15

Um you mentioned investors um and you know tenure treasuries and so forth. Let's take just a minute and and uh identify why farmland might be um attractive to the to investors. Maybe kind of touch on where we're at from a current investment situation, a financial situation, and why uh I mean you spoke about a little bit, but maybe a little bit deeper on why that land value might be or that land acquisition might be something that's palatable to an investor.

SPEAKER_00 7:49

Yeah, I think from an investor standpoint, it's a unique uh asset to have in your portfolio. I mean, you're you know, when you think about farmland, it's providing a multitude of things. You know, one is we we spoke about, you know, there is current income that's driven from that piece of farm ground. There's long-run appreciation opportunities that we've historically and currently have seen with farm ground. Uh, you've got, you know, inflation protection oftentimes that you see with with farm ground in that asset. And then also, too, you know, you are providing exposure to essential economic activity that's in the marketplace. So, you know, in my mind, you know, oftentimes we compare, you know, let's say an asset like farm ground with another equity or another asset, right? Such as stocks or bonds, whatever it may be. But I don't think it's necessarily a substitute. I think when we think about farm ground, I do think it's a diversifier within an investor's portfolio.

SPEAKER_01 8:43

And it's pretty solid. Like, you know, um, it's not like farmland value is gonna drop overnight or or jump overnight. So it's a it's kind of a solid foundational investment, I imagine, right?

SPEAKER_00 8:56

It is. And I think the the other thing that we're we're fundamentally uh seeing as well is you know, we're now reacting and we've been under a couple of years now of a higher rate environment. And so, you know, you think about the last decade and a half, you know, we've been under a very, very low uh interest rate environment, uh basically post-2008 financial crisis um and then leading up to COVID, you know, we were seeing interest rates, at least at Prime, being about three and a quarter percent. So, you know, I think now, you know, you look at farmers and you look at investors, you know, I think they're yeah, appreciation is important, don't get me wrong, but I do think they're paying more attention now as we are in a higher rate environment towards the income generation side and the possibilities there for that piece of farm ground.

SPEAKER_01 9:43

Right. So uh speaking of rates, we have a new Fed chair, and it sounds like he's going to be uh taking the Fed on a little bit of a different path than his predecessor. What does that mean for interest rates going forward and and how that impacts farmland value?

SPEAKER_00 10:00

That's a great question. I you know, I think when I uh you have to put you on the spot, but I'll ask the question. No, I I think it's an important question too, because we've we've come quite a long way here um the first seven months uh here within 2026 and just how we thought about you know where interest rates are going. I mean, Mike, don't forget we started 2026. We were talking about rate cuts, and we were talking about multiple rate cuts um in the in the in the US economy. But then we knew that we were gonna have a leadership change at the Fed. Uh, but I don't think we really fully understood the the balance of risk that's more favored towards the price stability side in the marketplace. So, you know, now you've got overall CPI, the consumer price index at 4.2%. Uh, we should have the June number come out here uh sometime next week, uh the second, third week of July. Uh and so I think when the concern I have is not necessarily towards just the energy component of CPI, but the fact that energy can also trickle out towards more uh things like services, goods, and food. And when I look at services, those services that services portion of uh the consumer price index still remains sticky. So for instance, if I look at sticky inflation and I exclude you know food and I exclude uh energy components of CPI and I exclude rent, I'm still close at 3% sticky CPI. So again, I look at that metric and I also look at inflation expectations. Uh, you know, we're running about four and a half percent with regard to one-year consumer inflation expectations. So again, I think consumers, you know, when we go through that affordability conversation, consumers expect inflation to be higher uh one year out. That's a problem for the Fed with regard to the price stability side of their dual mandate.

SPEAKER_01 11:50

Right. So if we kind of put a bow on all this, let's turn it, let's bring this back around. What does this mean for farmers?

SPEAKER_00 11:59

Yeah, I think for farmers, you know, I think one, any land value uh kind of purchase that you're evaluating, I think needs to be based on both the your cash flow potential and also the appreciation potential. And so again, it's I think it's easier to say that than to actually do that in today's environment. But again, I think those two things are really crucial. And I do think producers, if they're looking at buying an asset or an additional asset, you know, such as farm ground, I do think they need to be focused on four things. You know, one is purchase discipline, especially during uh the agricultural cycle uh that we're currently in, uh, your debt service capacity in order to take on that piece of farm ground, uh, looking at your liquidity situation and the overall grand scheme of things of your operation. And then also fourth, your balance sheet strength uh strength that you um have um with your your current operation. I would probably say, as we talked about the interest rate environment here for 2026, I would probably tell a lot of customers, farm credit customers, that we need to be comfortable in today's interest rate environment, uh, given the fact that we do have the price stability side or the inflation side that we got to be concerned about here to get down to that 2% target. So I think those four things are important. The other thing, Mike, too, is you know, getting back to both the farmland value conversation or the purchase conversation of farmland values and rent, why every farmer is different is because one, it just depends on how leveraged you are. And what I mean by that is, you know, me as a farmer, if I let's say just for instance, I'm gonna throw out an example. If I have 500 acres and I brought and I bought a combine, I might need additional acres to spread out my, you know, you know, per acre cost, and I might pay a little bit more for that piece of cash rent or that that farmland that may be up for auction. So again, you might a farmer might be in a situation where in order to reduce your equipment costs, you need to spread that equipment cost on more acres in order for you uh to lower that equipment cost. So again, every farm's different. We talk about farmland, farmland, it's not just local. I categorize it as hyperlocal. Every county, every district is different. And so I think all those things into consideration, I do think you know, you know, making sure that farmers um are evaluating farmland purchases and even cash around on cash flow potential as well as at least on the ownership side, the appreciation potential. Right.

SPEAKER_01 14:26

What about on the flip side? If I'm sitting here and I've got this 80 acres that, and I don't know if I want to keep it or sell it, is it a time to think about are is are am I gonna get pushed one way or the other to keep or sell? What's the climate look like for that?

SPEAKER_00 14:40

For for cash rents or just for ownership.

SPEAKER_01 14:43

Ownership.

SPEAKER_00 14:44

Yeah. So ownership, I think it really depends on one, um, you know, how often um how often that piece of ground or ground around that area uh comes up for for sale. Um I would say that high quality farm ground, I'm still, you know, in the marketplace seeing really strong uh um bidder strength. Um I think there's there's uh multiple bidders for uh different pieces of farm ground or good quality farm ground that have come up. I would say probably smaller uh sized uh acres, maybe not so good quality. Uh you might see less margin bidder strength there, but I do think that quality, high quality uh piece of farm ground, you're still seeing uh solid strength with regard to demand there. On the cash rent side, you know, I think it's interesting because I get a lot of producers that ask me, you know, what should the price of you know cash rents be? And my comeback to that is one, if you can negotiate a small or a lower cash rent in today's environment, let me know. I'm still trying to find a solution there. Um, but I do think one, if we think about the economics of farm ground and cash rents there, you know, one, you you're gonna see you you could see uh lower cash rents if you do see a reduction in bidder strength uh with regard to that cash rent. So again, it really depends on what the buyer's willing to uh to purchase for that cash rent. Yeah, the final thing too, Mike, at least on the cash rent side, is we have to remember that landowners are not homogenous. And so what I mean by that is you know, a farmer could be working with a family member, they could be working with an heir uh that's not you know uh you know, farming that piece of farm ground. Oftentimes, those uh uh those landowners, you know, they like to see a stable income check coming in and they like to keep um you know cash rents kind of level uh to receive that income. Whereas again, for instance, you might work with an investor, you might work with a um a manager that or a farm manager, and they may be following markets a little bit more, so they'd be maybe working with their landowner to say, you know what, commodity prices are a little bit lower, maybe we need to think about reducing cash rents here a little bit. So again, the I think the moral of the story is every situation is different, but also every farm's different.

SPEAKER_01 16:57

Right, right. Matt, as we wrap this up, is there anything we missed? We talked about a lot.

SPEAKER_00 17:02

Uh, I think we covered a lot. I think the big thing from the report is from a high-level standpoint, again, is you know, one of the most important findings that I would just want to reiterate is I don't think farmland is, it's not a single, uh, it's not a single asset class. And what I mean there is one, I think there's different states that generate different returns in different ways. You know, some regions may, you know, focus more or may see more cash income on that side of the ledger. Other states may rely more on appreciation. You know, that was the goal of kind of this paper, this market paper that I put out. Um, I think the other thing too, Mike, is you know, some markets, you know, may offer higher return potential, but they also may return higher volatility within that asset. So again, I think volatility is a really important metric there that farmers need to uh consider. Again, if you have, let's say, for instance, a piece of farm ground that historically, you know, averages 10% rate of return, and the volatility is is really high, it really just depends on what the on the risk appetite is for that uh for that investment portfolio. So again, farmland's not a single class, and there's different ways where returns can be, you know, kind of swayed, uh, either through the appreciation side or the cash income side.

SPEAKER_01 18:19

Farmers have questions about you know what what they should do either to purchase or rent or what where where can they go for that?

SPEAKER_00 18:27

Yeah, they can go to um well, you can check out our paper or my paper on terrainag.com. Uh certainly um I know Farm Credit Services of America, uh, which we work with very closely um with regard to as part of terrain. Uh they put out every um, I think twice a year, they uh come out with their uh uh uh their land uh kind of value survey that they do with their uh um appraisers there. So again, I think there's multiple ways uh that you can kind of look and get this information.

SPEAKER_01 18:58

Great. Well, thanks for uh chatting with me today, Matt. Uh we covered a lot of great ground and really appreciate it. Thanks, Mike. Well, that's all for now. Hope you enjoyed that conversation with Matt Erickson. As always, thanks for tuning in to Chat BDC. If you find it useful, drop a comment, subscribe, share, and tell all your friends. Be sure to check our regular content on BlackDirth Daily.com as well. Don't forget to sign up for that Black Dearth Daily newsletter. We'll be back tomorrow with more business news across the academy financial markets at the moment and goodbye for that.