Investment in U.S. farmland is still competitive with alternative investments, but the era of extremely low interest rates and extraordinarily high commodity prices is drawing to a close, according to a new report from the Rabobank Food & Agribusiness (FAR) Research and Advisory group.
“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 over the coming year or so,” says report author and Rabobank Food & Agribusiness Research and Advisory (FAR) 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 values 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. In the Western and Southeast U.S., the decline will be less marked than in the Midwest. 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.
Since the four dominant commodity crops (corn, soybeans, wheat and cotton) compete for the same acres in the Midwest, Plains and Delta regions, global grains/oilseed prices will be key factors in determining land values. As global stocks grow, prices will drop, leading to some decline in values over the next two to three years.
Corn led the ramp-up in commodity prices and the associated increase in ag land values. As such, if corn were to fall below 4.50/bu for an extended period of time, a significant decrease in land values could follow.
Vernon Crowder, senior analyst with FAR, co-authored the report and notes that in the Western U.S. agricultural land values are expected to move in the same direction as those in the Midwest.