With sharply lower commodity prices at hand, “one of the key supports for sky high farmland values is changing rapidly,” writes economist Brent Gloy at the Agricultural Economic Insights blog. “As economic returns in the farm sector fall, we should expect that the other key driver of high farmland prices, low interest rates, will come into much greater focus.” Gloy discusses land capitalization rates and relationships between farmland prices and interest rates.
“Overall, with lower commodity prices and returns available to farmland, it becomes even more imperative that interest rates stay low to hold farmland values at current levels.” However, the Federal Reserve has signaled it will allow higher short-term interest rates. A downturn in farm profitability and an upturn in interest rates would constrain the buoyant land market, he says, adding, “we must now be on guard for the unwinding of this situation which will likely begin to pressure farmland prices.”