Editor’s note: The following was written by Todd Kuethe and Bruce Sherrick with the University of Illinois Department of Agricultural and Consumer Economics. It is a presentation summary from the 2018 Illinois Farm Economics Summit.
Farmland prices across much of the Corn Belt region experienced a rapid appreciation from the early 2000s through roughly 2014, then retreated somewhat, but now appear to have plateaued.
This disagreement is driven by the uncertainty related to a number of important factors in the agricultural and broader economy.
Farmland prices are determined by buyer and seller expectations of current income, future income growth and the cost of capital (discount rate). Continued increases in many of the factors of production coupled with decreases in agricultural commodity prices have resulted in significant declines to farm incomes and farm operating profit margins in recent years.
In addition, the Federal Reserve has continued to increase the cost of short term borrowing (the Federal Funds rate) as the aggregate economy improves. Both of these forces place downward pressure on farmland prices in the near term.
However, the impact of interest rate increases is often overstated given the weak relationship between short term borrowing and farm mortgage rates, and the longstanding positive correlation between inflation and farmland values.
Farmland prices are also pressured in periods of significant policy uncertainty.
Many market observers, however, point toward the long-run earning potential of farmland as a way to justify higher expected farmland prices. Farmland prices may be supported by continued increases in the global demand for calories and proteins supplied by agricultural commodities. The natural geography of the Corn Belt ensures that the region is well-positioned to benefit from this expected growth.
In addition, many believe that emerging technological developments have the opportunity to drastically alter production agriculture.
Optimists also stress that farmland prices may be insulated from drastic declines as a result of the unique features of the modern agricultural sector. A relatively fixed supply of farmland and thin transaction markets, as well as the risk mitigation provided by the Federal Crop Insurance program, all help limit the potential for farmland prices to overreact.