U.S. farmland has posted strong price gains this year, with federal data showing a jump of more than 12% already over 2021. That has some financial institutions wondering how long the investment can produce such yields.

The gains are coming partly from developments elsewhere in the global economy as farmland is viewed as a hedge against inflation. While inflation is historically high these days, new interest in land is also being fueled by Russia’s invasion of Ukraine, trade tensions with China, droughts, and overseas supply chain problems, according to the Federal Reserve. That has prompted a flood of new investors coming into the sector, one broker told CoStar News.

The U.S. farm real estate value, a measurement of the value of all land and buildings on farms, is averaging $3,800 per acre for 2022, up $420 per acre from 2021 — a 12.4% increase — according to the latest data released this month by the U.S. Department of Agriculture.

The booming farm prices are higher than some other segments of the commercial real estate market battling the impact of high inflation. For the first half of this year, for example, multifamily rose 6.9% and offices gained 3.73%, according to CoStar data. And in July, deals in nonfarm property dropped off and prices pulled back from new heights reached a month earlier.

Kyle Rule, an agent with the land brokerage firm AcrePro who monitors a territory that cuts across central Indiana and Illinois, said the farmland price gains are drastic and the highest in a decade.

“Two years ago in my area, you could buy good ground for $9,000 to $11,000 [per acre] and now that same ground is selling for $15,000 to $17,000,” Rule said in an interview. “That’s over a 50% increase.”

The No. 1 reason for the higher prices, according to Rule, is that more investors outside farming are looking to diversify their holdings. That money, in turn, is giving sellers new capital to go buy more acreage — usually in a transaction allowed by the U.S. tax code called a 1031 exchange in which an investor defers capital gains taxes, Rule said.

“Farmers are always going to be a majority of the buyers and they are always going to be one of your best buyers,” he said. But “what we have now is many more interested buyers, all competing for the same piece of ground.”

Iowa posted the largest year-over-year gains in agricultural land values at 26% from July 2021 through June, according to the Federal Reserve Bank of Chicago’s August survey of bankers. Gains in the other states in the Chicago Fed’s district were Indiana, 25%; Illinois, 18%; and Wisconsin, 13%. Michigan data was not available.

Echoing Rule’s assessment, several bank respondents to the Chicago Fed’s survey mentioned new buyers are helping to push farmland values higher, indicating healthy demand.

But some bankers across the Midwest said farmland values may be now overpriced, according to the survey. And at least three-quarters of survey respondents in Illinois, Indiana and Iowa were of the view that farmland was overvalued.

Rule said the higher prices can hold a little longer, but agriculture land values are somewhat cyclical. Price gains do fall back but rarely collapse to their previous levels, he said. Eventually, they restart their climb back up.

Farmland is doing well against inflation, historically earning an approximate 2% spread to the consumer price index, John Heneghan, founder of investment advising firm Servant Financial in Chicago, told CoStar News in an email.

Heneghan invests through Promised Land, a private fund focused on acquiring and improving farmland in qualified “opportunity zones,” the federal tax credit program launched to target economically distressed areas across the country.

The human need for food in good economic times as well as bad gives farmland durable cash flow, he said. The war in Ukraine has “significantly reduced global grain production,” he added, raising commodity prices and the strategic importance of the sector.

The rising costs of farming brought on by inflation and global disruptions could cut into profitability, which in turn could hurt land prices, Heneghan said.

The projection for future price gains is already starting to weaken, according to the Chicago Fed. About 25% of survey respondents forecast higher farmland values during the July-through-September period, and 4% forecast lower values.

That is a narrower gap than in previous surveys, a reflection that bankers are beginning to moderate their outlook, the Chicago Fed said.

In addition, inflation is also eating into profits as farmers are paying more to run their operations. Prices from a year ago are up 13%, according to USDA data. Most notably, fertilizer and diesel prices rose dramatically.

“Although momentum from strong farm incomes contributed to higher farmland values, it was uncertain how long this effect would last, given the rising interest rate environment,” the Chicago Fed said.