There are many reasons for today’s rising land values. Most are based on sound economic fundamentals. Over the past decade, real net farm incomes have averaged almost $70 billion per year, more than 10 percent above the 1990s average. The expectation is that farm incomes will remain high for at least the next year or so. In addition, farm wealth is on the rise as farmers appear to not be using as much debt as was used in the 1970s. In fact, it appears that farmers are using at least a portion of the new found income and wealth to pay off debt at a near record pace. Further evidence that market discipline still exists is that farmland values fell when farm incomes dropped in 2009. In the 1970s, farmland values continued to rise after contractions in farm income.

In addition, there has been a substantial decrease in farmland sales, which is attributable to the lack of farms being put on the market, not a lack of demand for farmland. Farmland owners are apparently not selling their farm real estate assets at least until their alternative investment options improve. Finally, farmers are the primary purchasers of farmland and they are buying the land for long-term ownership. Most farmers do not buy farmland with the intent to sell it in order to capture capital gains, and many hold onto land as long as they are financially able to own it.

Still, some of the recent increases may be due to more transitory factors that are not sustainable. For example, we are in unprecedented times with respect to the monetary and fiscal policies. These policy decisions were made as a result of the severe economic downturn. But, the policies encourage borrowing and they also increase the attractiveness of more risky investments. In the case of interest rates, in the fourth quarter of 2010, both the Chicago and the Kansas City Federal Reserve banks reported the lowest real estate interest rates in their data series. Lower interest rates make borrowing cheaper but also decrease the rate of return in alternative investments. Other things equal, lower returns elsewhere in the economy increase the demand for farmland.

In many states, farm income is projected to be strong and farmers are repaying their debts. In fact, USDA reports that inflation-adjusted farm real estate debt has declined since 2008. When farmers do take on new debt, there doesn’t appear to be an irrational exuberance. With interest rates low, the demand for farmland exceeding the supply of land for sale and with strong commodity prices, land values should continue to increase or at least maintain their current levels for the foreseeable future.