Historically speaking, Schnitkey said, the last time farmland price exceeded capitalized value by a large margin was in the early 1980s, immediately prior to the large decline in Illinois farmland prices that occurred from 1982 through 1987.

“Currently, the situation in 2011 is not like the 1980s.  This suggests that either farmland returns have to decrease or interest rates have to increase before farmland prices fall,” Schnitkey said.

Schnitkey admits that these are disquieting economic times. Economic data suggest sluggish economic growth, raising the possibilities of a double-dip recession, he said.  The Federal Reserve has pursued policies that increased the money supply, leading to concerns of inflation in the future.  The inability of the United States, European Union countries, and several states within the United States to come to grips with fiscal imbalances and entitlement spending poses risks to the long-run economic future of Western countries, he said.

“These economic headwinds likely provide support for U.S. farmland prices,” Schnitkey said. “An economic downturn likely would reduce non-farm asset returns compared to farmland returns. The threat of inflation in the future places pressure on farmland prices as farmland and other real assets are perceived as safer stores of wealth than financial assets during inflationary times.  The threat of long-run instability places a premium on real assets over financial assets.  This suggests that a more stable general economic outlook would lead to less aggressive growth in farmland prices.”