Is Today’s Farmland Market Rational?

June 18, 2018 04:01 PM

For the past 12 months, the word most commonly used to describe farmland values is: stable. Prices vary by region. But overall prices have leveled off in most areas, after rising steadily for several years.


Average Cropland and Pasture Values
Will values stay on this sideways trend?

“I don’t foresee any reason that will create a radical departure from where we are now,” says Bruce Sherrick, a University of Illinois professor of agricultural and applied finance and director of the TIAA-CREF Center for Farmland Research. “The markets are incredibly rational right now.”

To analyze farmland prices, Sherrick suggests considering what a rational investor would be willing to pay for the potential from an asset, relative to the riskiness of the income stream over time. For farmland, he watches the 10-year constant maturity interest rate or CMT-10.

“The 10-year treasury turns out to be a reasonably good index for the rent-to-value ratio of long-duration assets,” he says. “For farmland, it provides a nice way of simply explaining to people and showing how it performs an asset.”

The graph below compares a plot through time of the 10-year treasury notes and the ratio of cash rent to underlying value of farmland based on aggregate USDA data. 


Farmland Rent-Value

“Two periods are interesting to focus on,” Sherrick says. “First, during the period from about 1978 to 1984, there was a stark departure between the CMT-10 and the rent-to-value ratios of farmland in Iowa, Illinois and Indiana suggesting that land returns were out of line with their capitalized values. Near the end of the period shown, the CMT-10 is actually below the rent-to-value ratios, although the movements in the CMT 10 since the end of 2017 have moved them back into a similar range.”
(Sherrick, along with his University of Illinois colleague, Gary Schnitkey, provide more detail in their farmdoc daily piece, Illinois Farmland Values in Context)

Looking forward, Sherrick says policy changes, farmer income, cap rate changes and interest rates will all influence farmland values. Farmland returns show consistent positive correlation with inflation, so that will also be important to watch. 

“I wouldn’t be shocked to see the farmland market do a bit of a recovery in the next five years,” he says. “I also wouldn’t be shocked to see additional decline. I don’t see anything that will fundamentally alter and create a breakpoint in the path in either direction.”

Find more tools to analyze and index farmland values at farmdoc daily. 

Sherrick spoke at the recent 2018 Emerging Issues in Agricultural Lending conference in Columbia, Mo.

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Spell Check

Mitchell, SD
6/19/2018 08:43 AM

  Every time I read one of these articles that "tries to justify" the value of today's Ag RE values, I (first) about fall off my chair from laughing, and then I about "puke", because the logic is so "self-serving", that it about makes me sick. Interesting that the two or three largest contributors to the "theory" that Ag values are "stable", or expected to rise in next 3-5 years, etc., etc. are members of some realtor group or appraisers group, college professors, and then the good ole boy club of the farm credit system. Can anyone else see any reasons for those groups to publicly express optimism?? = Job security?? = keep collateral values up there, (don't need a repeat of the 1980's market crash??) I agree 110% that over the last 10 years, Ag land appears to be a hell of an investment, if purchased at the start of the "Super Cycle". While land was cruising, (due to extreme run-up of grain prices caused by ethanol boom of 2005-2009, and drought of 2012) same time investment stocks crashed in 2007-2009...Low was March of 2009) And interest rates fell to lows not seen in 50 years........(Really, do some believe the rates for long term money of 3-4-5% is the "new normal"??--if so this = big time stupid) So I could write an article to and find "Lots of stuff" to support this "theory" of the last ten years. I wonder how the buyers of Ag Land in 2013-14 (at the VERY PEAK)....really feel about the "Investment they made then"?? Kind of like some stock investments made in 2005-06?? (Or even now??) I am guessing that more than one buyer of Ag RE, wishes they had not bought in 2013-2014!!?? granted those that bought from 2002-2008(??) happy, maybe happy, until it goes down to those same levels?? If corn and beans do not turn around and rally soon, and Interest rates stop rising.......where will the land value settle out at?? County assessors are nervous, county commissioners are nervous, and some Investors continue to buy on the down slide, to maintain some form of value??

bad axe, MI
6/18/2018 08:24 PM

  The reason farmland is up is because the credit market debt in the USA is 70 trillion .It was 4.7 trillion in 1980. So that means you have 70 trillion dollars of deposits in banks and savings accounts to buy things. The problem is the 93.5 million workers in this country gross 4.5 trillion in wages per year to service this credit market debt. So assets in time will crash and burn in this country to rebalance. The farmer will end up losing everything because you can't buy farm assets at current values and make a profit and service debt. You can't buy land at $10,000.00 per acre farm, it for 30+ years at a loss and come out ahead. Russian farm land is $300.00 per acre and just as good as ours

Ag Banker
NW Illinois , IL
6/25/2018 09:10 AM

  Land values have never been rational in my 35+ years of financing agriculture with the exception of the late 1980's and early 90's when Farm Credit was selling off the inventory they accumulated from the last time land values would never go down since they aren't making anymore land. There is zero support from an economic stand point for our current land values, Net return to land after all operating costs and machinery depr is roughly $250/ac, The Fed is normalizing interest rates so assuming the historical cash return of 5% = $5000/ac and yet we can still sell this at $10,000/ac Tell me how this works out in the end? Are returns going to increase or will interest rates go down? Remember never fight the Fed Reserve. Wait till we have a 2 as the first number of the price of a bushel of corn. We bankers have already leveraged up the land debt to fix the losses that have occurred in ag since 2012. When Farm Credit finally realizes it too look out below. Remember the fact that the old neighbor your paying over $300/ac rent too and has his land paid for isn't helping you when your banker says no more. The overall equity in Agriculture is irrelevant, the only equity position that matters is yours.


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