Farmland values: Shaping more than farm income

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Farmland values are often viewed as the bellwether for the U.S. farm sector. Historically, booming farm incomes have been quickly capitalized into farmland values. Over the past year, cropland values in the Corn Belt have jumped more than 25% above year ago levels according to various university and Federal Reserve surveys. Moreover, ranchland values are posting strong double-digit gains in some regions of the country.

Farmland values, however, are shaped by more than farm incomes. Interest rate shifts affect the rate at which income flows are capitalized into farmland values. Urbanization and recreation use for hunting, fishing, and wildlife watching have also transformed nonfarm demand for land in many parts of the nation. At the same time, the supply of U.S. farmland for sale remains limited. Together, strong farm and nonfarm demand and the relatively limited number of farm sales have propelled sharp increases in U.S. farmland values.

Despite rising farmland prices, risks remain. While inflation adjusted farmland values have reached record highs, what are the risks that they could retreat once again? Farmland values are capable of falling just as sharply as they have risen, as evidenced by the 1970s farm boom and the 1980s farm bust. The volatility in agricultural prices has increased and farm incomes have fluctuated widely over the past decade. Although the crisis of the 1980s is nearly 30 years behind us, memories of the financial hardship and personal loss that it caused remain and frequently cause people to question whether a repeat of the 1980s is in store for the agricultural sector.

This Choices theme explores recent farmland value trends and the risks to farmland markets. The issue is organized into two broad sections. The first consists of four articles selected to provide readers with background on farm and pasture land value trends, valuation basics, and the role of debt in farmland ownership. The second section includes two articles that examine how changes in factors such as income, interest rates, or urban pressures influence farmland values. It is our hope that readers of the issue will gain some perspective on farmland values, the factors that determine these values, and how values might change as economic conditions shift.

You may find the complete set of 'Farmland Values' theme articles at the Choices archive on farmdoc under 2nd Quarter 2011 at: http://farmdoc.illinois.edu/policy/index.asp.

Jason Henderson is Vice President and Omaha Branch Executive, Federal Reserve Bank of Kansas City, Omaha, Nebraska and Brent Gloy is Associate Professor and Director of the Center for Commercial Agriculture, Purdue University, West Lafayette, Indiana.

 

The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City, the Federal Reserve System, or Purdue University.

Source: FarmDocDaily



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Kirt    
Idaho  |  August, 02, 2011 at 01:02 AM

This is shaping up like the 80's! Commodity prices drove up ground prices, investors hopped on the train, interest rates spikes and the train ran right off the tracks. These commodity prices are a currency exchange issue....ground did not magically produce 25% more. Think your net worth looks good now with high priced ground? Wait till the correction. Those in the 80's that did not buy the hype but kept the cash in reserves bought ground at a very good value. Better to be old and smart that thinking that pig will keep flying!!


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