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First Mid Ag Services News

Does farmland lose value in drought?

July 10, 2023

Land Values: Looking back over time and droughts, the answer might surprise you.

By: Michael Lauher

Farm managers are hearing it more and more often: How does the drought impact farmland values? It’s a question that’s weighing on the minds of many as we approach the fall farmland sale season.

According to data released by the U.S. Drought Monitor for its June 27 report, nearly 60% of the state was experiencing severe drought just before a derecho charged across the heart of Illinois. The stark reminder of the unpredictable nature of our weather patterns and the juxtaposition of parched lands amid torrential rain provides a poignant backdrop to the discussion.

US drought monitor Illinois June 27, 2023

U.S. Drought Monitor map of Illinois from June 27, 2023

The drought that started the 2023 crop year may continue through the growing season, or it may not. Either way, it is an interesting question.

Do droughts impact farmland values in Illinois?

A drought, simply put, is a prolonged period of abnormally low rainfall, leading to a shortage of water that adversely affects the growth of crops, the life of livestock and the overall health of an ecosystem.

Droughts may occur for a variety of reasons, including shifts in wind patterns, changes in sea surface temperatures and variations in solar radiation. These events can be hard to predict, with their onset and end often difficult to determine.

One of the key tools used to monitor drought conditions is the Palmer Drought Severity Index. Developed by meteorologist Wayne Palmer in the 1960s, the index measures the duration and intensity of long-term drought-inducing circulation patterns. It uses temperature and rainfall information in a formula to determine dryness.

The Palmer index is most effective in determining long-term drought — a matter of several months and affects water-sensitive industries like agriculture. However, because it uses a zero as “normal,” the Palmer index can also show when there are wetter-than-usual conditions, which can lead to other weather risks, like flooding.

The Illinois State Climatologist office has published information about droughts in Illinois and compiled Palmer Drought Severity Index data provided by the National Oceanic and Atmospheric Administration into the following graph.

Illinois Palmer Drought Severity Index Line Graph

Illinois Palmer Drought Severity Index line graph

Periods of wet years and dry years show up nicely in the graph, with notable droughts highlighted.

The National Agricultural Statistics Service, an agency of USDA, conducts an annual survey of farmland values, which serves as a key resource for those in the ag sector. This comprehensive survey, known as the Land Values Summary, published in late July, provides data on the average value of agricultural land and buildings.

Taking the Illinois farmland values reported by the NASS Land Values Summary from 1910 to the present, I calculated the percentage change in the reported land values for each year.

Except for 1931, for each year following a drought, Illinois land values increased. This information is illustrated in the following chart.

Percent change in Illinois land value following droughts

Bar chart showing percent change in Illinois land value following droughts.

So, it doesn’t really seem that droughts have had much impact on farmland values. I believe there are a few reasons for this:

Disaster payments and crop insurance. Disaster payments to farmers have a long history in the U.S., dating back to the 1930s when the federal government first started providing financial assistance to farmers hit by droughts, floods and other natural disasters. Today, crop insurance serves as a first line of defense, enabling farmers to insure their crops against a wide range of perils, including drought, excessive moisture, freeze and disease. Through proactive risk management, farmers cover losses when disaster strikes, helping to stabilize farm income and ensure the resilience of the agricultural sector.

Improved genetics. Over the past few decades, significant strides have been made in crop science, leading to the development of genetically improved corn and soybean varieties with enhanced drought tolerance. In the face of drought, these resilient crops can continue to grow and produce, albeit at reduced rates, rather than wilting or dying off. This genetic improvement mitigates the impact of drought on crop yield. It is a remarkable testament to the power of science in aiding agriculture to adapt to changing environmental conditions and ensuring food security.

Long-term perspective. Farming is deeply intertwined with the volatility of weather patterns. Droughts come and go, bringing with them challenging times and testing the resilience of both farmers and their crops. Yet, throughout, farmland itself demonstrates remarkable stability as an investment. This stability is anchored in the global demand for food and the finite supply of arable land.

Advancements in farming and crop genetics continue to mitigate the impacts of drought. As a result, farmland continues to stand as a resilient and enduring investment, underscoring its strategic importance in a balanced investment portfolio.

Reprinted with permission from Farm Progress