The June 2010 survey of Indiana (Dobbins and Cook, 2010) shows a farmland price for average quality farmland of $4,419 per acre, and the associated cash rental rate was $161 per acre. These values produce a capitalization rate of 3.64 percent. With 10-year U.S. Treasury bonds at 3.25 percent, these values imply that investors were willing to accept rates of return only slightly higher than the yield on the 10-year Treasury bond for owning farmland, or that they expected substantial income growth from farmland (Gloy, et al., 2011).

If interest rates increase, it would likely put substantial pressure on cash rent multiples and farmland values. Holding other things equal, if capitalization rates would increase from 3.64 percent to 4.64 percent, the multiple would decrease from its current level of 27 to 21.5. In order to maintain land values, expectations of future income would need to rise and/or investors would have to accept a lower risk premium. For example, if the multiple decreased to 21.5, the current cash rent on average quality Indiana farmland would have to rise from $161 per acre to nearly $205 per acre to maintain land values.

While there are many factors which support the case for increased farmland income in the future, one must be very careful in assuming growth rates beyond the general rate of inflation and the rate of productivity growth in agriculture. Sustained growth beyond this level would require substantial demand growth that would manifest itself in continually higher agricultural product prices.