Farmland price outlook in 2014 and beyond
Recent commodity price declines have led to increasing concerns that farmland prices could decline as a result of potential decreases in income to farmland. Corn prices, for example, have decreased from over $5.00 per bushel during the summer of 2013 to prices in the mid-$3.00 range during the summer of 2014 reflecting expectations of large yields. During the first half of 2014, farmland values appear to have stopped increasing rapidly, as they did from 2006 through 2013, with some reports of small decreases and softening demand. The purpose of this farmdoc daily article is to provide an analysis of capitalized values of current returns and examine implications for 2014 and beyond. The findings include that current forecasted income, which represents a decline from recent periods' income levels, is not likely to result in large farmland price decreases. However, capitalization rate increases, which may be commensurate with increases in general interest rates, do pose a larger risk factor.
Farmland prices have increased dramatically during recent years. The National Agricultural Statistical Service (NASS) - an agency of the US Department of Agriculture - reports cropland values for many U.S. states (click farmdoc daily August 15, 2014 for an Excel worksheet with data). According to NASS, the average cropland value in Illinois increased from $3,640 per acre in 2006 to $7,700 per acre in 2014 representing an increase of 212% or a 9.58% continuously compounded annual growth rate. (see Table 1).
While not providing a completely clear picture, recent reports suggest that farmland prices stabilized during the first six months of 2014, with some reports suggesting slight decreases and others suggesting slight increases. Purdue University reported that land values for average Indiana farmland increased by 7.1% from June 2013 to June 2014, but decreased by 1.9% from January 2014 to June 2014. In its August 2014 AgLetter, the Chicago Federal Reserve Bank (FED) reported that northern and central Illinois land values increased by 3% between April 1, 2014 and July 1, 2014. In the Agricultural Finance Monitor released in the second quarter, the St Louis FED indicated that second quarter 2014 land values were 3.5% lower than first quarter 2014 values in the Eighth Fed District representing southern Illinois and Indiana, western Kentucky and Tennessee, Northern Mississippi, Arkansas, and eastern Missouri. While not identical, none of the reports indicate large changes in farmland prices in the first six months of 2014.