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Where Will Farmland Prices Go from Here?

July 29, 2011

Farmland prices are not in a bubble, economists say, instead they reflect optimist expectations of future farmland returns.

 
Courtesy of the the farm doc daily site.
 

Issued by Gary Schnitkey, University of Illinois Farm Management Specialist

Agricultural economists recently completed a series of articles dealing with farmland prices that appeared in Choices, a publication of the Agricultural and Applied Economics Association.
 
A general consensus from these articles is that farmland prices are not in a bubble, but current farmland prices may reflect optimist expectations of future farmland returns (see Duffy and Gloy, Boehlje, Dobbins, Hurt, and Baker). Lower farmland returns or higher interest rates could result in lower farmland prices (see Schnitkey and Sherrick).
 
An asset bubble can occur when an asset’s returns must increase by a large margin over the current return level so as to justify the asset’s current price level.
 
This situation occurred for tech stocks in the late 1990s, when many tech stocks had no income but high stock prices. The high stock prices were based on expectations of high incomes in future years, expectations that turned out to be false. When it was recognized that higher returns would not materialize, the price of many tech stocks declined dramatically.
 
This asset bubble scenario is not where farmland is currently. Returns to farmland have increased in the last several years due to higher commodity prices. These higher returns than have become capitalized into farmland prices.
 
Moreover, interest rates have decreased in recent years, causing a decline in the return on competing assets and a decrease in the rate at which futures returns are discounted. Given the current low level of interest rates, farmland prices are in line with historical relationships with current farmland returns.
 
Of farmland return increases and interest rate decreases, the contribution of interest rate decreases to farmland price increases is perhaps less recognized. In 1981, the interest rate on 10-year constant-maturity Treasury notes was 13.9%. This rate reached 3.2% in 2010. In terms of underlying value of farmland, interest rate decreases have had as large an impact as return increases. Currently, a one percent increase in interest rates will cause the discounted stream of farmland returns to decrease by 24% (see Table 1 of Schnitkey and Sherrick).
 
Before farmland prices decline either expectations of farmland returns will fall or interest rates will increase. Neither seems likely in the short term.
 
Commodity prices are high with futures prices pointing toward high prices for the next several years. The Federal Reserve appears intent on keeping interest rates at low levels for the foreseeable future. Hence, strong farmland price likely will continue until the fundamental factors impacting farmland change.

 

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Courtesy of the the farm doc daily site

 

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RELATED TOPICS: Farm Business, Crops, Land

 
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COMMENTS (2 Comments)

James - Midland, SD
Inerest Rates are so low they only have one way they can go, and that is up! When and if the gov''t can decide on debt ceiling issues, some one is going to realize the US can't keep spending the way we are and our current debt is going to cause us trouble making the rates go higher. Also, production levels on not the prime ground are and should staart putting a brake on some of these values.
5:29 PM Jul 29th
 
James - Midland, SD
Inerest Rates are so low they only have one way they can go, and that is up! When and if the gov''t can decide on debt ceiling issues, some one is going to realize the US can't keep spending the way we are and our current debt is going to cause us trouble making the rates go higher. Also, production levels on not the prime ground are and should staart putting a brake on some of these values.
5:29 PM Jul 29th
 



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