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As farmland values ​​soar, so do fears of a price bubble

Cash, farmers and investors have driven farmland values ​​up at a breathtaking rate this year — a 12% gain nationwide and more than 20% in three Farm Belt states. “Given recent experiences with fluctuations in the broader economy and past farmland price dynamics, many market participants are concerned that the rapid increase in farmland prices is a sign of a speculative bubble,” said three Purdue University economists.

Two-thirds of agricultural professionals who participated in Purdue’s annual land-value survey said prices for high-quality farmland in Indiana are too high, while 27% of respondents said prices are expected to rise even more between this year and 2027.

While bubbles are relatively easy to explain — they occur when the price of land exceeds its revenue potential — they are difficult to measure, economists wrote in the quarterly Purdue Agricultural Economics Review. They applied two benchmarks to Indiana prices: a comparison of land prices to capital returns from cash rents and a “double-question survey” of market expectations developed by two scholars at the University of Southern California to identify property bubbles.

“A relatively simple (mathematical) model based on current discount rates and cash rents suggests that 2022 farmland prices will be higher than justified by market fundamentals,” wrote economists Todd Kuthe, Mohammad Doudzai and Pete Drost. A double-question survey of professionals found concern about high land prices and expectations of modest further increases.

“For future increases to be sustainable, agricultural land revenue will need to increase or concessional rates will need to decrease,” he wrote. “Most economists expect interest rates to rise as a result of inflationary pressures and economic uncertainty. Thus, for farmland prices to remain at record-high levels, farmland incomes must rise in tandem with interest rate increases.

The three economists said there are limitations in the tools used to analyze the land market. For example, mathematical formulas can obscure various factors that influence individual sales, and there are many ways to measure the income potential of land. A two-question survey is a subjective measurement. Still, “a quarter of all respondents have expectations consistent with farmland price bubbles,” meaning they expect prices to rise even though they think land is currently overpriced.

In the Purdue survey, professionals including farm managers, land brokers, rural appraisers, lenders, farmers and USDA county directors reported only a 30% increase in high-quality and average farmland values ​​from 2021.

USDA’s annual land values ​​report lists increases of 10% or more in 19 states by 2021. The largest increases were 25.2% in Kansas, 21.4% in Iowa and 21% in Nebraska. With a 12.7% increase, land values ​​in Illinois rose by $1,000 per acre in one year and 25% in a decade.

There are frequent concerns over farmland values ​​and price bubbles. The backdrop is often the agricultural recession of the mid-1980s, the hardest time for most farmers in living memory, when the average value of US farmland fell 27% in five years. It was 13 years before values ​​regained their pre-recession levels. 80% of agricultural property is land.

Kuethe said the recent, pronounced surge in land values ​​was supported by a “combination of higher incomes and higher agricultural liquidity” with inflation and interest rates. In the 1980s, the Federal Reserve raised interest rates to prevent inflation, and at the same time commodity prices and farm incomes fell.

“Hold on to your hat,” said Purdue survey participants. “As a lender in the 1970s, we thought we were doing 50% loan-to-value mortgages, which (a) turned to 90% in the short term because incomes fell and interest rates rose.”

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