The Corn Belt includes the relatively homogenous row-crop heavy production region across much of the Midwest, including Iowa, Illinois, Indiana, Ohio, and Missouri. Iowa and Illinois rank first and second, respectively, in the value of agricultural outputs in the region, and all five states rank in the top 13 nationally in terms of agricultural production value, each in the top 10 for corn and soybean production.
The total value of production exceeds $125 billion in receipts across all commodities in the region annually.
As suggested by the name, the region dominates in the production of corn (and soybeans) with Illinois and Iowa combining for over 30% of the nation's total annual production. The financial performance of investments in the Corn Belt can be characterized as a long history of steady annual income that follows and generally exceeds the return to Treasuries, with reliable but more variable appreciation over time. Total returns have been competitive or have exceeded returns from investments in publicly traded equities with much lower volatility, but the “thin market” and heterogenous nature of farm investments does make access to the asset class more complicated than direct investments in equities. As noted in the overview, but at an even more profound level, farmland investments in the Corn Belt have served as remarkable inflation hedges with highly correlated returns that have exceeded inflation in all but a few distinct years. Additionally, the Corn Belt tends to be somewhat of a leading indicator for returns in other parts of the country with exposure to coarse grain production and tends to register both increases and decreases in economic fortunes a bit ahead of the regions such as the Delta and PNW to some degree.
Farmland in the Corn Belt has continued its remarkable recent run of years with high appreciation rates and above-average farm incomes. However, transactional volumes have slowed considerably in the later parts of 2023, and there remains a sense of caution about future sales volume returning in 2024. Neighboring farmers have always been the primary purchasers of farmland in the Corn Belt, but the share of active farmer cash purchasers has increased markedly as higher current interest rates have kept some leveraged buyers and institutional buyers on the sideline. The market has shown considerable strength with prices leveling or backing off only slightly from the peaks in early to mid-2023. High-quality farmland in the Corn Belt is truly viewed as the gold standard for agricultural investments in any case, so it shows the greatest residual demand of any region and has the greatest concentration of “deep pocket” buyers of any region of the country.
The basic economic factors that drive the farmland markets in the Corn Belt can be summarized as income, interest rates, and inflation. On the farmer side, income potential is the most important factor whether for purchasing or for paying cash rents to control the land. A collection of positive factors over the past few years included a run-up in commodity prices along with the attendant support of crop insurance prices, a strong balance sheet effect from the series of government payments stemming from the trade war with China, and pandemic-related payments, strong world demand signals, and ever-increasing choruses calling for payments to support future conservation and carbon sequestration efforts at the field level.
Turning to the impact of elevated interest rates, the sector carries very low aggregate long-term real estate leverage at about 13%, and much of that is in fixed-rate financing that to some degree became locked in with increases in new-money borrowing rates over the past 18 months. Operating loans do represent an increased burden, but for many operators, even a 4% increase in their operating line rates equates to just a few bushels of production. The main effect of increased interest rates is probably to limit the interest of investor-buyers who typically carry more leverage than individual farmers. Finally, the rationalization of expected inflation at new higher levels compared to the levels artificially held low following both the housing crisis and the pandemic actually bodes well for long-term farmland prices. In total, the “valuation” effects in farmland have shifted a bit toward the appreciation side and away from the current income side, but apparently with little impact on long-term expected total returns.
Farmland markets in the Midwest in general continue to move toward cash rent and flexible cash rental arrangements with a tick up in custom farming arrangements as well. About 60% of total acreage is leased in the Corn Belt and these lease arrangements are viewed as “sticky” for many reasons. The result to those outside the ag sector may appear to be slow to respond, as rental rates tend to move less quickly than annual incomes, with the resulting smoothness of annual returns to investors being incredibly stable.
The transactional pace question that has many concerned in the farmland brokerage space is whether the volume of transactions will return to its more normal historical levels. The long-term volume of agricultural land brought to market in arms-length transactions has been about 1.5% of total acres over much of the Corn Belt. From late 2020 through parts of 2022, the volume was meaningfully higher than historical averages but has slowed significantly in nearly all markets. This pattern raises the question about whether the previous period represented an abnormal acceleration, or whether there is a building balance of transactions that will accelerate in the future if economic conditions change. In either case, the demand for exposure to farmland in otherwise equity-heavy portfolios remains strong, and thus buyers sidelined by higher interest rates are likely to return as well as conditions evolve and interest rate markets normalize.
Farmland is a slow-turnover, long-duration asset with higher acquisition and disposition costs than pure financial assets, and thus requires intentional and committed acquisition strategies to attain meaningful holdings. The Corn Belt has a great deal of historic and continuing interest by non-operating investors – a feature that is likely to continue and return with capacity to absorb any increase in transactional volume without requiring substantial decreases in prices given the attractive return features of investments in the region.
SUMMARY
The Corn Belt continues to be the most important region for row crop production in the U.S. and thus in turn for the world. The region has performed exceptionally well during recent periods of instability in traditional financial markets, higher returns to alternative investments, and under increasingly unified expectations around inflation. Government payments for, and societal interest in moving toward a lower carbon energy sector have transitioned the conversation about farmland from being cited as a primary pollutant to being recognized as a critical resource to move toward greener energy generation in the future. Interest rate markets (and expected inflation levels) are beginning to normalize, and the rationalization of higher borrowing costs has begun to creep into normal capital costs for ownership while also registering the positive effects of inflation on long-term appreciation. In total, the factors surrounding agricultural production and investment valuation models that create the steady and competitive returns, inflation hedging features, and diversification benefits in the Corn Belt region appear to remain firmly intact in the region for now and into the future.
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