A team of USDA economists digging into the runup in farmland values confirms what we've been writing about in LandOwner the past several years -- gains in the price of farmland are driven by rising farm incomes and low interest rates and possibly not a speculative bubble.
"Trends in farm incomes, cash rents and interest rates suggest that farmland values were supported by farm earnings in 2009 and 2010," they state while pointing out that "there have been periods of imbalances in the recent past. Since 2009. though farmland values have been high, the discounted returns from renting farmland have been higher," the researchers state. "Also, in the last two years, average income from farming has been more than sufficient to service the debt on farm real estate purchases at current mortgage rates. A 'speculative bubble' forming in farmland markets cannot be ruled out, but at a national level, farmland values have been supported of late by fundamental farm factors such as farm earnings.
"However, over 2005-08 and during 1978-85. farming income was insufficient to service debt on farm real estate purchases," they continue. "Historically low interest rates are likely a significant contributor to farming's current ability to support higher land values. Increase in interest rates would likely put downward pressure on farmland values."
The study also had some interesting insights concerning non-farm-operator landowners. "Three of the top four regions in terms of land in agriculture (Northern and Southern Plains and the Corn Belt) have non-operating owners owning more than 30% of the land. Non-operators owned 29% of all land in farms in 2007, and they owned 77% of farmland that is rented. Despite recent increases in foreign ownership of forest land, as of February 2009, only 1.7% of privately owned land in farms or forest, or 22.8 million acres, was owned by foreigners," they state.
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