The market for farmland prices remains strong, but a market correction is likely coming soon, said Craig L. Dobbins, a professor of agricultural economics at Purdue University. The pressing question is whether that correction will be gentle or dramatic.
“We don’t have bubbles often. Farmland prices go up, then there is a small correction down, and then they go up again,” he said. “But, is this one of those rare bubbles?”
Dobbins said there are multiple reasons farmland prices “have gone up at a rapid rate the last several years,” but the main one is a lack of supply to meet increased demand. Farmers buy farmland to farm it, generate income from it and have control over it — not to sell it — and farmers have been the majority of the buyers during this boom.
Consequently, it’s “a thin market,” without many transactions, he said. “Not much land changes hands every year.”
With a recently shaky economy, “putting your money in farmland has been a relatively good investment,” he said. “So, if you’re an owner, why sell?”
Rick Gentis is the senior vice president and agribusiness manager for iAB Financial Bank, and he said farmland values have doubled — or even tripled — over the last three to five years. About five years ago, $4,000 per acre was the top price. Recently, however, he’s seen $9,000 or even $12,000 per acre.
He agreed with Dobbins that a languishing economy has made farmland a shrewd investment.
“You haven’t been able to make money anywhere else, so land has been a fantastic investment over the last five years,” he said.
In addition, improved profitability in production agriculture has been a leading source of the strong market for farmland, Dobbins said. There has been demand on the corn side for producing ethanol, and the Chinese have been importing more and more soybeans from the United States, as well.
Furthermore, because of last year’s drought, corn and soybean supply was much smaller than anticipated, he said. Prices have come down, and the outlook for crops this year looks excellent.
Gentis also said he’s anticipating a strong crop this year because of favorable weather. Prices should drop, but yields will be good.
Dobbins said another boost to farmland prices over the last several years has been persistently low interest rates, which aid real estate markets of all kinds.
“Interest rates have been low, and crop prices have been super high,” Gentis said.
Those rates are rising a bit, however, which is not conducive to values continuing their meteoric rise.
“Rising long-term interest rates dampen the increase in farmland values,” Dobbins said. Commodity prices are also declining, which could also hamper the market.
A third reason prices could be in for a fall deals with psychology. If interest rates increase, and commodity prices decrease, people might begin to feel more pessimistic about the future, and Dobbins said what people think has a huge effect on the market.
Also, the rest of the world is responding to high food prices by upping their own production, he said. As supply increases, prices will decrease — though “supply always moves faster than demand.”
“If supplies are good in the next couple months, margins will narrow, and people will become more cautious,” he said. “I anticipate the increases in farmland values in the near term will slow down, but it might stay that way for awhile.”
It’s unclear if this is really the high, as Dobbins said it’s difficult to forecast.
However, “if I were thinking about selling a farm in the next five years, now would be a good time — rather than waiting,” he said. There might not be an increase like what’s been seen recently, and the market might be nearing — or at — the peak.
Consequently, current farmland values might be on the high side, he said, and a downward adjustment could be coming.
While some might imagine this could lead to an influx of sales, Dobbins said that wouldn’t be the case.
“When the outlook gets gloomy, people hold because they don’t want to put something on the market when the value is dropping,” he said.
Farmland is a long-term, generational way of life, so there won’t be much land on the market — no matter how the market is doing.
Gentis said most veteran farmers who have been in the business long enough to see the highs and the lows have been cautious. They’ve been “sitting on their money,” and “we’ve been real conservative on what we loan per acre.”
“We used to loan 70-75 percent on a lot of ground, but now we loan less than 50 percent,” he said. “We’re trying to keep farmers and the bank out of trouble.”
Gentis said his bank emphasizes a conservative financial outlook, always worrying about the worst things that could happen. With Congress still unable to pass a farm bill, farmers are forced to deal with numerous unknowns, and they’re unable to plan ahead with any certainty.
The bottom line, Dobbins said, is that over the long history of farmland values “they go up more often than they go down, and there have not been many times when we’ve had a prolonged decrease in farmland values.”