The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
Mike Walsten has covered major business trends in agriculture for more than 40 years.
That's the view of three University of Illinois ag economists as they analyze current farmland prices, cash rents and capitalization rates. Gary Schnitkey, Bruce Sherrick and Todd Kuethe say in their review: "While headwinds related to farm income will likely continue, current farmland prices do not appear out of line with current cash rent and interest rate levels. That is, farmland price bubbles or conditions that would be seen as such are not evident in the current market. If large farmland price decreases do occur in the near future, it is likely that they would be associated with unexpected interest rate increases or additional shocks to expected future agricultural income"
Key for their analysis is farmland's current capitalization rate. Using state average cash rent and farmland price levels as reported by USDA's NASS, they find the average value of farmland is below its capitalized value. While that could change if interest rates surge suddenly, they write: " it is not evident that interest rates will rise in the near term. The Fed continues to discuss ending low interest rate policies, but continues to push the ending of those policies into the future. Moreover, interest rates near the middle of the yield curve may not rise at the same rate as short-term rates as the Fed begins to implement policies to raise short-term interest rates."
Click here for their full analysis.
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Land prices are trending down right now, not collapsing, but trending down. A lot of land in this area is appearing on the market for those speculators that want out before the bubble does burst. As farm income steadily declines, land prices will decline also even when interest rates are low. Why? Lack of operating capital from lenders. That in turn creates an inability to acquire or lease more land. Land leases will come down along with land prices. You throw in a 100 or 200 basis point increase in interest and the bubble will burst. People still want to know, 'what's my payment' instead of, 'what does that do to my debt load.' For some farmers that are current on their debt in my area, they're having difficulty getting 2016 operating loans--why? They don't cash flow at today's commodity prices, typical yields and high input costs. Lenders will play along for a year or so with low prices as long as you have the net worth, but when that erodes due to continued low commodity prices and throw in any rise in rates the producer will be hosed. Land prices will collapse. The Fed created a monster by keeping interest rates too low for too long. This will reverberate throughout the economy when rates finally do rise.