Farmland indexed by the National Council of Real Estate Investment Fiduciaries (NCREIF) hit 2.94 percent this quarter, up from 1.97 percent last quarter, and 1.91 percent in the third quarter of 2012. Last quarter was the first time that the index had dropped since 2010, but it has returned to its general upward trend. Of course, seasonal effects are very important when looking at farmland returns, so the annual improvement is more important than the quarterly improvement.

Farmland

NCREIF specifically looks at farmland

NCREIF specifically looks at farmland that is at least partially held by tax-exempt organizations, so it doesn’t measure how much farmland should cost, but the strong growth is in line with concerns about a new bubble after ten years of rising prices. An acre of land in Iowa has gone up 20 percent this year, William Watts reports for Market Watch, up from $3,850 in 2009 to $8,400 today, with similar trends across the country.

“If you ask, is farmland in a bubble, I’ll say, no,” said John Taylor, national farm and ranch executive for U.S. Trust. “But if you ask, are some people paying bubble prices, I’ll say, yes.”

Farm prices increasing due to rising farm incomes

Farm prices have been driven up by rising farm incomes, a combination of high commodity prices and low income, but commodities have settled down recently and tapering will push interest rates up over the next year. The Department of Agriculture expects farm income to set a new record this year, rising 6 percent to $121 billion nationwide, which would justify higher farm prices but could also convince too many people to enter the market.

Now the question is whether farm prices will maintain their high levels in the face of challenging market conditions. If they do, it could mean that prices are being driven by sentiment more than fundamentals, the tell-tale sign of a bubble. If prices come down slightly, then the high prices may be justified by underlying factors, even if they are somewhat inflated right now. In the second case, value investors can be on the lookout for deals if people oversell in response to a bump in the road, since there’s no reason to be pessimistic on farmland prices in the long-term.