Minding Ag's Business
|A 20% to 25% Land Crash?|
Marcia, in your June Businesslink column in "The Progressive Farmer" magazine, you quote a Farm Credit Administration economist saying, "We’re expecting a land value correction of 20% to 25%" over the next few years. What can make this happen? The price of the crop does not have the bearing as in the past. The price of land here has not stopped going up. --Cal
Cal, I can’t speak for the Farm Credit Administration’s rationale, but in general most economists say what buyers pay for land is based on future income prospects. In the long-run, that means land values mirror farm income and/or the potential rents landowners think they can charge. (Interest rates also affect affordability of land, but not as much as farm profits).
The problem is most of the “official” 10-year estimates of commodity prices from USDA and the University of Missouri’s FAPRI, for example, have corn averaging about $4 over the next decade, not the $6 to $7 cash corn growers averaged in 2012, so I think FCA is assuming future farm incomes won’t be as robust the next 5-10 years as they were in the last decade. There’s always a lag though, as in the 1980s when farm incomes fell first but the price of land didn’t bottom for five or six years.
Recent Federal Reserve surveys found a kind of mixed bag in land value trends, so some parts of the country are showing stable or slightly increasing values. However, in the bellwether central Corn Belt states covered by the Chicago Federal Reserve, 2014 cash rents fell an average of 2% this year and overall farmland prices fell 1% between Jan. 1 and April 1, the first quarterly decrease since 2009. Indiana and Illinois knocked 4% off their values during this period, Michigan slipped 3% but Iowa and Wisconsin advanced an average of 1%, based on surveys of 214 ag lenders. (See Chicago Fed's most recent report athttp://www.chicagofed.org/…) To me, these results sound like a holding pattern, not a huge swing.
Not all forecasters believe farmland is poised for a 20% to 25% setback, however. As I’ve reported earlier, Bruce Sherrick, a professor of farmland economics at the TIAA-CREF Center for Farmland Research, sees few parallels between today and the 1980s, when U.S. farmland last experienced a rare but severe 50% correction. Not only are interest rates much lower today, but farm leverage is miniscule, farm incomes remain above their 10-year average and crop revenue insurance coverage now keeps a floor on incomes that didn’t exist in the 1980s. Sherrick sees much more stability in farmland values going forward, with no crash landing ahead. For details go to http://farmdocdaily.illinois.edu/…
Which way do you readers see farmland values heading next?
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