The combination of $4.50/bu. corn and a slight interest rate increase could result in farmland values dramatically toppling. According to internal modeling by AgriBank, one of the largest banks in the Farm Credit System, this decline could reach 30% to 34% in a 15 state area from Wyoming to Ohio and Minnesota to Arkansas.
This could be similar to the implications of a 50% decline in net farm income in terms of impact on cropland values. Still, AgriBank officials term what they see ahead as a soft landing for farmland values as distinguished from the hard crash during the 1980s. The decline would take several years to play out.
While 30% sounds big, that’s no more than the increase in some states in 2013 alone. For instance, North Dakota had a 41.5% increase in farmland values last year—the largest of any state in the AgriBank district. This is due to a combination of a shift to corn from other crops and the oil-drilling boom.
Values rose 30.2% in South Dakota, 19.8% in Minnesota, 19% in Nebraska and 17.8% in Iowa, states posting the most rapid increase. On the other end of the spectrum, values actually declined 2.7% in Wyoming, rose a modest 1.7% in Wisconsin, 3.5% in Tennessee, 8% in Arkansas and 8.7% in Kentucky. Iowa had the largest per acre value of $8,600, followed by Illinois at $7,900 and Indiana at $7,100.
"For every $1 decline in corn prices, average district cropland values could decline by an average of $298/acre and for every 1 percentage point increase in the 10-year Treasury rate, average district cropland values would decline by an average of $357/acre," according to AgriBank’s regression models. Two separate models indicate that a 50% decline in net income would result in approximately a 33% decline in farmland values.
The bank says that while interest rates influence farmland values, a more immediate challenge is declining crop prices. According to public and private forecasts AgriBank tracks, the average U.S. corn price will be $4.56/bu. for 2013/14, $4.12 next year then gradually increasing to $4.33/bu. by 2017. "While lower than the recent $6.50 to $7 levels, these U.S. average corn prices would still be well above the previous 10-year average of $3.51/bu." Soybean prices are expected in the $9 to $11/bu. range.
While the bank thinks interest rates (the 10-year Treasury rate that tracks closely with farmland rates) likely bottomed out at 1.8% for all of 2012, rates averaged just 2.33% for 2013 and are not expected to go above 4% until early 2017. AgriBank’s analysis also found, not surprisingly, that cash rent values are highly sensitive to changes in corn prices.