What is in this article?:
- Soaring farmland values have generated considerable national news attention and given rise to questions about the factors driving farmland values higher and whether current farmland values are reasonable. Many in the agricultural sector are worried that the farm sector is headed for a repeat of the farmland value bubble that collapsed in the 1980s.
The bottom line
Farmland prices have undergone a significant increase in recent years. These increases have come in part, in response to increased farm earnings and low interest rates. Were these factors to reverse it would put downward pressure on land values. It is important for market participants to understand that earnings associated with farmland can be quite volatile. This is particularly true in the case of crop prices where recent price increases have boosted expected revenue several hundred dollars per acre for most Corn Belt farms. Had prices moved the other direction and investors felt that this was a more accurate representation of future income levels, it would be hard to make the economic case for significantly higher farmland values.
It is difficult to conclude at this time that current farmland market expectations regarding the economic fundamentals are misguided. Currently, one could make the case that average sale prices are reasonable and could even support higher prices; but one could also argue that, given the extreme price volatility in agricultural markets,moves to the downside are also quite likely.
For now, it appears that farmland values reflect investor’s beliefs that farm incomes will remain high and capitalization rates will remain low. Will these expectations materialize? In truth, it will be very difficult to determine whether these expectations are correct until hindsight provides the luxury of 20/20 vision. At this point, it appears that investors are at least considering market fundamentals before making purchase decisions. One situation to be concerned about is when investors must use arguments unrelated to market fundamentals to justify prices. Such factors typically involve debates over the magnitude of capital gains that landowners can expect, arguments that conservative collateral and lending standards need to be scrapped for higher loan-to-value ratio loans, development of new credit instruments with flexible repayment schemes or balloon payments to give more farmers a better “chance” to buy land, suggestions that if one doesn’t buy a farm today they’ll never be able to afford one, false hopes that farmland prices can’t go down because they aren’t making any more of it, or that inflation will always carry land values higher. If these discussions become common place, it is clearly time to assess whether the market has a sound view of realistic economic expectations. Let’s hope that time doesn’t come.
For More Information
Dobbins, C.L. and K. Cook. (2010, August). Indiana farmland values and cash rents: renewed strength in a weak economy. Purdue Agricultural Economics Report. Department of Agricultural Economics, Purdue University. West Lafayette, IN.
Gloy, B.A., C. Hurt, M.D. Boehlje, and C. Dobbins. (2011, March). Farmland values: current and future prospects. Center for Commercial Agriculture Staff Paper. Department of Agricultural Economics Purdue University. West Lafayette, IN. Available at: http://www.agecon.purdue.edu/commercialag/progevents/LandValuesWebinar
Johnson, B. (2010, September 8). “A Thin Real-Estate Market Becomes Even Leaner.” Cornhusker Economics, University of Nebraska-Lincoln.
Purdue University Department of Agricultural Economics. (2010, November). 2011 Purdue crop cost and return guide, October 2010 estimates. ID-166-W, Purdue University Extension. Available at: http://www.agecon.purdue.edu/extension/pubs/id166_2011_Nov_01_2010.pdf