WASHINGTON, Aug. 1, 2014 – An “asset bubble” may be developing in farmland prices which have risen now for 12 straight years, Rabobank Food and Agribusiness Research and Advisory (FAR) group warns in a report.
“Land values have followed fundamental economic drivers up, but there exists the possibility that land values may not follow these fundamental drivers down,” Sterling Liddell, a FAR group vice president and the report’s author, said in a release.
The report – Land Values 2014: At the Tipping Point – says farmland values rose in recent years because of low interest rates, high commodity prices, and limited availability of real estate for sale. However, commodity prices have fallen sharply. in some case approaching four-year lows, and interest rates are beginning to work their way up.
The report noted the drop in commodity prices has the potential to drive land rental values down as margins tighten. USDA is predicting a corn crop rivaling the record harvest of 2013 as well as healthy soybean and wheat crops, so reserves for all three commodities will likely force prices lower, the report said.
Interest rates also play a large factor in what a producer is willing – or can afford – to pay for land, and the report said higher rates could make renting a more desirable option than buying. The report said recent announcements by Federal Reserve Chair Janet Yellen regarding plans to cut back quantitative easing programs may be signaling higher rates.
“Historically, low interest rates have accommodated higher land values by keeping mortgage payments competitive with rental payments,” FAR said in the report. “However, increasing interest rates from current historically low levels will mean land values will need to decrease in order to keep mortgage payments competitive with rental payments.”
Land values have risen most dramatically in the Midwest, where the effects of a bubble may be most acute.
According to USDA and Rabobank data, Indiana, Illinois, Iowa, Minnesota, North Dakota, South Dakota, Nebraska, and Kansas all reported increases of more than 100 percent between 2005 and 2013. South Dakota and North Dakota all showed increases of more than 218 percent, and Nebraska showed the biggest increase, a 242 percent jump.
Because putting lower yielding, marginal land into production was feasible during periods of high commodity prices, producers began to take a more aggressive stance in the land market in recent years. Producers still purchase 80 percent of available farmland, but Rabobank predicts interest in buying land will plateau much like the prices of the land on which they will be bidding.
“(W)e expect farmers to become more conservative with investments when faced with tight margins,” the report said. “Consequently, market forces are likely to be effective in driving needed land value decreases.”
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