US land prices 'to extend decline into 2017'

11.08.2016

US farmland prices will extend their decline into 2017 – but the extent of the drop will depend on enthusiasm for raising interest rates, the University of Illinois said, after official data showed the first drop in values for seven years.

Gary Schnitkey, at the department's agricultural and consumer economics department, flagged a "continued need" to cut land rents, potentially at an accelerating pace, to keep farmers in the black at a time of weak crop values.

"Recent declines in commodity prices lead to low revenues projections for both 2016 and 2017, further aggravating the need to reduce costs," Professor Schnitkey said.

Basing his research on the Illinois land market, he said that falls in cash rents "must be larger than" the $12-per-acre drops seen during the last two years if farmers' costs "are to be below revenue", even taking into account "some progress" made in cutting spending on inputs such as fertilizer.

'Values should be expected to decrease'

The correlation between land values and rental rates, which have showed "similar trends", suggests further pressure on farm prices – unless there is a rebound in crop values.

"Given reduced cash rents in the future, farmland values should be expected to decrease.

"Given current levels of commodity prices, one should expect continued decreases in cash rents and land values into 2017."

However, the rate of decline will depend on interest rates, with Professor Schnitkey flagging that since 1987, changes in yields on 10-year Treasury bonds have "mirrored" farmland returns.

"If rates on Treasuries and other relatively safe financial assets remain low, land prices could decrease at roughly the same rate as cash rents.

However, rising interest rates "could cause larger decreases in farmland values".

Rate expectations

The comments come at a time of enhanced expectations of rise in US interest rates, potentially next month, with the change of an increase boosted by data last week showing payrolls expanded by 255,000 in July, well ahead of the 180,000 figure that economists had expected.

Official US data last week also showed the first drop in US farmland values since 2009, during the global economic crisis, although the fall over the past year was a modest $10 per acre, taking the average price to $3,010 per acre.

However, the overall figure disguised a wide discrepancy between states, with irrigated farmland in Kansas, the top wheat-growing state, falling by 8.3% year on year, while that in Georgia appreciated by 11.1%.

Northern Plains farmland, in state from Kansas to North Dakota, overall proved a particularly bad performer, with values falling by 4.3% year on year to an average of $2,240 per acre.

Corn Belt land depreciated by 0.9% to $6,290 per acre, including a 1.3% drop to $7,400 per acre in Illinois.


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