Finally, figure 6 combines information from related income and interest rate series to create an implied capitalization rate by dividing the income by the value of the asset that generated the income - a commonly used related presentation of capitalized values has been presented in various forms in prior FDD posts and numerous prior presentations (e.g. http://farmland.illinois.edu/). This graph shows the case of Illinois as an example, and is remarkably similar when examined for most production regions in the US.
The one obvious departure occurs in the period leading to the crisis, but is absent in general in recent periods. This presentation of the capitalization rate does not say anything directly about asset values except that the multiple willing to be paid for the income seems to be in line with that implied by other rational valuation principles.
In summary, there are substantial risks facing agriculture and the markets for assets used in agricultural production, as has always been the case. To understand these, it is also important to also have a clear sense of the factors associated with the fundamental drivers in the market. Income expectations remain reasonable and fairly stable, debt rates are low and interest rates are also historically low providing a buffer against potential asset revaluations, and crop insurance has fundamentally altered the riskiness of income as intended. There can still be important adjustments in any market as individuals refine and adjust their understanding of the factors influencing future income potential, but hopefully this "story in pictures" adds to the accuracy of the understanding of agricultural farmland markets.
Note: The views expressed herein are solely the authors' opinions and do not necessarily reflect those of entities with whom professionally affiliated. As always, we welcome comments, suggestions, and questions that might be usefully addressed in future postings.
This line of inquiry has been particularly improved by conversations and helpful communications with individuals involved in the Global Ag Investing Conference, members of the Real Assets group at TIAA, David Oppedahl at the Chicago Federal Reserve, Jackson Takach at FAMC, and Todd Kuethe at the University of Illinois among others. All errors and omissions are the authors' alone.
 Among the prior references to the potential for a farmland bubble, Robert Shiller referred to the farmland as the "dark horse" for the next bubble (2011), FDIC hosted a conference titled "Don't Bet the Farm" investigating farmland pricing and the potential for a farmland bubble (2011), and AEI's Alec Pollack has made comparisons between the farmland price patterns and the housing crash patterns preceding the financial crisis (2012).
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