Is agricultural malaise taking hold of the land market?

Now that earnings in the agricultural sector are significantly declining, that expensive land could become a burden. Especially in the US, comparisons are already regularly drawn with the agricultural crisis under Ronald Reagan in the 1980s. While the situation then and now is certainly not directly comparable, there are some interesting parallels, including for the Dutch situation.

The Dutch and American land markets naturally differ in many respects. Average production per hectare differs here from the US. Besides agricultural forces, land is also being sought in the Netherlands by players outside the sector. Nevertheless, land prices have risen dramatically in both the US and the Netherlands. Seventy-five years ago, land could be purchased in the Netherlands for the equivalent of around €800 per hectare, while in the US the price was below $100 per acre. That has risen to almost €100.000 per hectare in the Netherlands and $4.350 per acre in the US in 2024.

Land prices, however, didn't rise in a straight line over the period. Following the relatively high grain prices of the 1970s, land prices tripled. It's worth noting, however, that this was also the time of the oil crisis, which pushed inflation above 10%. A slowing economy and a sharp drop in agricultural product prices, while costs fell much less, depressed land prices.

Inflation
The economic conditions are different than around the big farm crisis of the 1980s. We don't have mountains of butter and grain in Europe now, and interest rates are much lower than the 10% and higher that were common some forty years ago. Where several experts do see parallels is in the decline in prices for agricultural products, while the inputs farmers need for production have fallen much less sharply. High inflation plays a role in this. Costs for labor, insurance, and other inputs are more or less linked to inflation, while this is not the case for wheat or milk.

There's an interesting parallel here with the 1980s. In the long run, land has always proven to be a stable investment. The trick, however, is to leave enough room in the budget to meet the interest and repayment obligations to the bank. Interest rates are considerably lower than in the 1980s, but on the other hand, banks in the Netherlands, the EU, and the US are demanding faster repayments. Interest-only or nearly interest-only mortgages for land, common 40 years ago, no longer exist. The drain on the cash flow of farmers who recently financed a land expansion with the bank is therefore perhaps somewhat comparable.

Self-protection
It's not expected that agricultural businesses will be driven directly into bankruptcy (especially in the Netherlands). After the 2007/08 financial crisis, the rules for providing loans were tightened considerably. From an entrepreneurial perspective, these rules may sometimes be perceived as unnecessarily burdensome, but in a situation like this, it's perhaps a good thing that overly enthusiastic entrepreneurs are protected from themselves. Despite the stricter rules, it's not inconceivable that the number of agricultural businesses under special management will increase. These don't necessarily have to be the recent growth companies, of course.

A shift in the agricultural market in the broader sense could mean that the land market will also cool down somewhat. We saw this in the late 1970s and early 1980s, but also at the beginning of this century. From 2001 to 2005, the average land price in the Netherlands fell by over 30%. Incidentally, it rose again just as quickly as the land price fell. It's certainly not a given that land prices will fall. Of course, there are other factors at play in the land market, such as the development of housing, business parks, and nature reserves. But that land prices will simply continue to rise steeply (as has been the case over the past twenty years) is also not a certainty.