A surge in interest rates could result in a 15% to 20% decline in central U.S. farmland values, warn economists with Rabobank. But because the bulk of recent farmland purchases have been made with the heavy use of cash instead of financing, the report authors believe the potential contraction will be manageable.
The report, from the Rabobank Food & Agribusiness (FAR) Research and Advisory Group, states the era of extremely low interest rates and extraordinarily high commodity prices is drawing to a close. "We'll likely see lower commodity prices this year, but they aren't going to be low enough long enough to substantially impact land values for the coming year or so," says report author and senior analyst Sterling Liddell. "In the short term, strong farmer balance sheets and high rental rates will support current levels. However, decreasing commodity prices will keep the value from accelerating as rapidly as they have been."
The report, "Land Values Peaking Out--But Not Down," finds in the medium term, the single greatest risk to U.S. agricultural land values is looming higher interest rates. Interest rates have been increasing through the first half of 2013, but based on the current Federal Reserve policy, a significant increase isn't expected until 2014 or 2015. "We are entering an era where planning how you're going to pay for your land is likely to become as important as planning for marketing your crop," notes Liddell.
The report forecast finds a decline in land values in the central U.S. of 15% to 20% percent over the next three years if commodity prices remain low and interest rates rise from below 3% to a rate more consistent with the early 2000s of 4%. "Given current Federal Reserve policy, 10-year and 30-year bond rates averaging less than 4% to 5% are the most likely outcome for for at least the next three years. While a return to 10% Treasury rates is possible, our current worst-case scenario is a 6% interest rate similar to the 1990s," the report states.
In the Western and Southeast U.S., the decline will be less marked than in the Midwest, the report states. The key determinant in the susceptibility to land value changes is an area's reliance on grain and oilseeds. While an increase in interest rates will have a similar impact on agricultural land values throughout the country, the amount of change will depend on the type of crop production and proximity to urban areas.
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