With crop prices at multiyear lows and interest rates expected to inch up over the next few years, a Purdue University agricultural economist believes the decade-long increase in farmland values might soon be over.
“We are looking at about a 5% to 10% correction over each of the next three years,” he said. “It’s normal for a market that has been so strong to take a little breather.”
Langemeier said the rally was due in large part to the increased production of corn-based ethanol and strong export markets for soybeans, which drove crop prices higher and made farmland a more attractive investment.
But corn and soybean prices have been in a tailspin recently, falling to their lowest levels in five years on expectations of a record yield and a large global grain surplus.
“Commodity prices do have an impact on farmland values, but they’re not the only factor,” Langemeier said. “What happens with interest rates will also help determine the severity and length of any downturn in farmland values.”
Interest rates have been held in check for the past five years by a slumping economy. In periods of recession or slow economic growth, the government tends to keep rates low to stimulate economic activity. Lower interest rates make it less expensive to borrow money for large purchases, such as farmland.
But with the national economy beginning to show signs of recovery, a short-term rate hike is likely sometime in 2015, Langemeier said. Higher interest rates typically mean lower demand for farmland.
“That would put some additional downward pressure on the market,” he said, “but federal policymakers are not likely to raise rates too high and risk sending the economy back into recession.”
A decline in cash rental rates is also likely, Langemeier said. If current price projections hold, cash rental rates are expected to drop 5% to 10% in each of the next three years.