Farmland values tend to fall when interest rates rise, but the rate increases since the Nov. 8 presidential election “are not large enough to suggest that decreases in farmland prices need to occur,” says economist Gary Schnitkey of U-Illinois. “However, farmland prices could face downward pressure if interest rates continue to increase.”
Land values already are under pressure from the sharp decline in commodity prices since the 2013 end of the agricultural boom that began in 2006. USDA says net farm income this year will be 54 percent of the record $123.7 billion of 2013. Farm real estate will decline marginally in value this year, according to USDA’s Nov. 30 estimate.
Writing at farmdoc Daily, Schnitkey says the capitalized value of Illinois farmland, reflected in rental rates, is well above the average price of the land, $7,450 an acre. If interest rates jump to 4 percent, which would be in line with suggestions of a higher Federal fund rate, the capitalized value of farmland would plummet by one-fourth of its value to $5,525 an acre. “If those rates occur, the … capitalization formula suggests that farmland prices could face significant downward pressure,” says Schnittkey.
Farmland values fall during interest rate increases for two reasons, said Schnitkey. One is that higher interest rates mean higher costs to retire a loan used to buy the land. The other is that as rates rise, investors find other attractive places offering higher returns for their money.