Skyrocketing farmland values — up 17.6 percent in Nebraska and 18 percent in Iowa from the fourth quarter of 2009 to the fourth quarter of 2010 — show no sign of abating anytime soon.
But that could change if interest rates rise or producer margins fall.
The key drivers of agricultural land value are commodity price, interest rate and the available supply of land, says Sterling Liddell, vice president of food and agri-business research for Rabo Agri-Finance. Over time, it’s likely that increasing production costs will adversely affect margins, and that, combined with higher interest rates, will drive the value of agricultural land down, he adds.
He said a decline in farmland values is likely to be moderate rather than severe.
“A large crash in agricultural land (value) is not expected at this point,” he said in an Agri-Talk radio interview last week.
He argued against the notion that farmland values could someday burst as part of a speculative bubble.
“The nature of a speculative bubble is when an asset actually loses contact with its fundamental value and is inflated beyond that value,” he said. “In the case of agricultural land, it’s still consistent with its ability to generate a profit and, therefore, doesn’t show a lot of the signs of actually being a speculative bubble.”
“Over the last 10 years, agricultural land investment has been one of the few parts of the economy that has actually generated a positive return,” he said.
The strong presence of farmers in the land market, rather than outside speculators, is another argument against a speculative bubble, Liddell points out. And, he adds, “What we have seen over the last five years is actually an increase in the investment in land by farmers.”
In summary, this is what Liddell sees on the horizon: some increase in agricultural land values in the short-term and the possibility of moderate decreases in the longer-term.
Click "play" in the top audio bar to hear the entire interview.