The price of farmland is high, but not necessarily out of line with current economic returns. As a result, "the situation in 2011 is not like the 1980s," says an analysis of farmland values and returns by University of Illinois ag economist Gary Schnitkey.
He studied actual Illinois farmland values versus the projected value based on capitalized value using the interest rate of the 10-year Treasury note. He found that "capitalized values closely tracked actual farmland prices since the mid-1980s," he writes. "In 2010," he continues, "farmland price was below the capitalized value by $438. In 2011, the $5,800 per acre farmland price was $221 above the capitalized value of $5,579 per acre. The switch to price being above the capitalized values suggests that farmland prices are increasing quicker than there discounted returns. However, the $221 higher farmland price in 2011 is not without historical precedents. Between 2005 through 2008, the average farmland price in Illinois exceeded capitalized value."
"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," he continued. "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."
Click here to read his full analysis.
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