Will the Drought Affect Farmland Values?

With the drought in the Northern Plains this spring and summer, crop yields are looking to be quite variable throughout the region. Spring rains were spotty and conditions can change from one mile to the next. So how will this drought impact future land values?  While the future is yet to be determined, there are a number of factors that point to a strong sales season.

  • Commodity Prices: With production issues in the US and abroad, strong Chinese demand for US crops and a generally favorable environment for commodity markets, crop prices have reached levels not seen since 2012 and 2013. This has boosted farmers’ optimism and will boost profitability for some in the 2021 crop season. 
  • Crop insurance: In modern times, almost all farmers carry some type of crop insurance. These policies offer a guaranteed level of revenue to the farmers based on their historical yields (APH) and the crop futures price. Typically, farmers carry insurance levels that cover 50 to 80 percent of their APH. With the current commodity prices higher than they have been in the past few years, protection levels for famers are quite good. 
  • Interest Rates: As a fallout from the pandemic, interest rates have dipped over the last year and are near record lows. This is one of the most important factors in farmland values as most farmland purchases entail some type of financing. Lower rates are very helpful in supporting strong farmland values.
  • Government Payments: There is a decent possibility of another round of WHIP + payments to be made to farmers for the 2020 and 2021 crop seasons. This would provide additional support to farmers on top of crop insurance for yield losses caused by the drought and would be favorable for the land market. 

The combination of high commodity prices, low interest rates and crop insurance is mostly negating any production issues inflicted by the drought. When considering all the factors in determining land values, we believe the land market is going to be strong for the upcoming sales season