If the low commodity prices persist into the future – a widespread concern – “it is becoming clear…there will be pressure on farmland values to end their upward march and likely fall,” says Brent Gloy at the blog Agricultural Economic Insights. Land prices are based on expectation of future income as well as current returns. Returns to farmland are more than double their rate of a decade ago, but will drop sharply this year, to around $200-$250 an acre, from 2013’s levels.
Prices for good-quality Indiana farmland are higher than would be justified by USDA’s projected commodity prices in coming years and a 3 percent capitalization rate, writes Gloy. “This would indicate that either market participants are expecting greater returns than implied by the USDA baseline price forecasts or that they are willing to capitalize earnings at lower capitalization rate. Both scenarios are plausible,” he said. The 2014 farm law will provide some support for land values.
“However, one should watch farmland values closely in the coming years, and particularly if the current low commodity prices persist for several years.”