Ready to Burst?

Farmland prices are well above average trends

Fence postThe value of farmland has seen a significant increase during the last decade. According to a University of Missouri agricultural economist, low mortgage rates and record income per acre may be driving farmland values higher than is sustainable.

“We’re looking at interest rates close to the lowest level in 60 years, making it easier to finance and buy an expensive item like farmland,” said Ron Plain, the D. Howard Doane Professor of Agricultural and Applied Economics at the MU College of Agriculture, Food and Natural Resources.  “We’ve had record corn, soybean and wheat prices lately, cattle prices have also been at record levels, so we have had a fast run-up in land prices.”

Plain says on average farmland values historically increase about six percent per year, but twice there has been a deviation from that trend.

Ron Plain.Ron Plain.

“Back in the 1970s we got way above trend and it looks like that is happening again,” Plain said. “Last year we were over $500 per acre above trend for the average acre of Missouri farmland.”

Will History Repeat Itself?

The 1970 run-up of land values created a bubble that burst in the early 1980s, collapsing farmland prices.

“In 1981, Missouri farmland prices were 150 percent above trend with the trend going up six percent per year. Without a price drop it would have taken a long time to close that gap,” Plain said. “Now, Missouri farmland articles are 22 to 25 percent above a six percent growth trend. Four years of steady land prices and the trend will have caught up with where we are. So we are not nearly as vulnerable. The downside risk isn’t anywhere near what it was in the early 1980s.”

A factor in the 1980s bubble popping was a huge increase in interest rates. Plain said many farmers took on a lot of debt and became heavily leveraged.

“Thus far this run-up hasn’t lasted long enough to cause that, but my prediction is we’ll set a new record in values in 2013 and we’ll sell more land, so that leverage number is likely to increase,” Plain said. “Keep an eye on that if you are bidding for land and by all means stay away from variable interest rate loans.”

Lower Income Coming

Plain said that crop values have probably peaked and declining prices for corn, soybean and wheat should be expected going forward. That will reduce income per acre and cause people to be a little less aggressive in chasing farmland. If inflation returns to the economy, it’s a good bet the Federal Reserve will raise interest rates, Plain said.

“If you combine falling crop prices with rising interest rates we could see a decline or at least stabilization in farmland prices very quickly,” Plain continued.

Pasture land hasn’t seen near the run-up in prices that crop land has in recent years, but Plain said that may change.

“We have the smallest cattle inventory this year since 1952,” Plain said. “It looks like we are going to see some increases in cattle prices that will probably push pasture values up in the next few years.”

Plain says the same rules apply for pasture land – be careful with variable interest rate loans and avoid getting heavily leveraged with a small down payment or you can quickly find yourself in a difficult situation.