Falling crop prices paired with the expected interest rate increases could mean trouble for U.S. farmland prices, according to a report by Financial Times reporter Gregory Meyer.
History Of U.S. Farmland Prices
Meyer tells of what farmland prices in the U.S. were like at the beginning of the 20th century. At that time, prices for grain were quite high, interest rates were low and U.S. farmland was selling for a premium. Prices for farmland rose 70 percent in the first two decades of the century. Then between the end of World War I and 1940, U.S. farmland prices fell back down to where they were in 1900.
Warning Signs About Potentially Falling Farmland Prices
We’ve actually seen something similar happen in the economic climate over the last 10 years. At this point, interest rates are about as low as they can go, and crop prices are dropping. In fact, corn from the Chicago Board of Trade that was delivered after harvest hit its lowest rate in almost a full year.
Another warning sign that falling farmland prices may be ahead is the ratio of rents which have been paid to land prices. It’s dropped by about 1 percentage point over the last 10 years. In other words, we’re seeing a price-to-rent multiple expansion, which is similar to the price-to-earnings multiple that is used on the stock market.
Meyer spoke with Farm Credit Administration economist Stephen Gabriel, who said we could see farmland prices fall by 20 percent. Currently the best farmland in the U.S. is priced much higher than it is in other parts of the world. Farmland in Russia’s prime farming region costs just a fifth of the price of farmland in Illinois, which is one of the major farming areas in the U.S.
Fitch Ratings also warns that if the current low interest rates and the extremely high crop prices should suddenly reverse, then a major correction in the value of farmland will likely follow. This could result in federal backing being needed for the U.S. Farm Credit System, which is sponsored by the government. If the system needs federal backing, then it would put a pinch on an already stretched federal budget.
This Time Might Be Different
Of course there are those who argue that we won’t see a major price decrease in farmland prices. They say that this time it’s different because of the rapid increase in global population, which is expected to hit 9 billion by 2050.
The National Council of Real Estate Investment Fiduciaries reports that farmland has returned 20.5 percent to investors over the past year. Also most farmers are carrying debt that’s relatively low in comparison to their assets.
Further reading Farmland Index Posts Largest Q1 Increase in Recorded History
