What is in this article?:
- Soaring farmland values have led many people to raise the question of whether or not farmland is on a speculative ‘bubble’ and due for a price correction.
- Strong economic fundamentals—rising incomes and a limited number of farms for sale—appear to be driving recent land price gains.
- Farmland values will be shaped by economic returns and the highly volatile markets make the future path of farmland values very uncertain.
Rising at fastest pace
Farmland values are rising at their fastest pace since the 1970s, raising questions about a speculative bubble with respect to farmland. Currently, the supply and demand fundamentals are supportive of today’s rising land values. But, there are several factors to consider. The current land rent to land value for farmland is at the lowest level it has ever been. If this ratio returns to its historical levels, will the change be driven by an adjustment to land values or cash rents? A study comparing stock market returns, as measured by the Standard and Poor’s 500 Index, to Iowa farmland shows that the only years returns on an investment in the stock market exceeded those on Iowa farmland was for farmland purchased during the 1970s and early 1980s (Duffy, 2011a), the last time we experienced such a rapid increase in farmland prices. Monetary and fiscal policies are other factors to consider because they will impact the health of the agricultural economy and land values.
Land is the residual claimant to income in agriculture. With the current and projected levels of income for the sector expected to remain high, land values could increase further. But, as has happened in the past, rising land values, cash rents, and the other costs of production could remove excess profits. As a result, farm analysts must remain vigilant in watching farmland value trends. The longer land values increase at current rates, the greater the tendency to think farmland values will always increase; an attitude which led to the unbridled exuberance in the farmland market of the 1970s and in the urban housing market in the recent time frame. With low interest rates and easy credit, the likelihood of assuming too much debt will increase as well.
Farmland values and issues surrounding farmland ownership have fluctuated over time. Concerns over soil conservation, absentee owners and the ability to start farming have also shifted over time. What has not changed is the increasing age of the farmland owners. Land is a unique asset. Once owned, most people want to keep it. Farmers buy land to own it, not to sell it. The land becomes part of their business, part of their retirement plan, and a part of their legacy. Yet, over time, farmland values and farmland ownership have shifted with changing economic fortunes on the farm. With increased volatility in crop markets, future shifts in farmland values and farm ownership trends are likely.
For More Information
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