Economic Recovery May Make Farmland Investments Less Attractive

Economic Recovery May Make Farmland Investments Less Attractive

Center for Commercial Agriculture director says demand in Midwest farmland is likely to trend lower as interest rates move higher

With crop prices at multiyear lows and interest rates expected to inch up over the next few years, a Purdue University agricultural economist believes the decade-long increase in farmland values might soon be over.

Michael Langemeier, associate director of Purdue's Center for Commercial Agriculture, says any decline should be relatively slight and spread over more than one year.

"We are looking at about a 5-10% correction over each of the next three years," he said. "It's normal for a market that has been so strong to take a little breather."

Center for Commercial Agriculture director says demand in Midwest farmland is likely to trend lower as interest rates move higher

Langemeier said land rallies over the past several years were due in large part to the increased production of corn-based ethanol and strong export markets for soybeans, which drove crop prices higher and made farmland a more attractive investment.

Related: Midwest Farmland Values Expected to Decrease Again at Year-end

But corn and soybean prices have now fallen to their lowest levels in five years on expectations of a record yield and a large global grain surplus.

"Commodity prices do have an impact on farmland values, but they're not the only factor," Langemeier said. "What happens with interest rates will also help determine the severity and length of any downturn in farmland values."

Interest rates have been held in check for the past five years by a slumping economy.  In periods of recession or slow economic growth, the government tends to keep rates low to stimulate economic activity. Lower interest rates make it less expensive to borrow money for large purchases, such as farmland.

As the national economy beginning to show signs of recovery, a short-term rate hike is likely sometime in 2015, Langemeier said. Higher interest rates typically mean lower demand for farmland.

Related: Ag Bankers Hear Message: Riskier Times Coming

"That would put some additional downward pressure on the market," he said, "but federal policymakers are not likely to raise rates too high and risk sending the economy back into recession."

A decline in cash rental rates is also likely, Langemeier said.  If current price projections hold, cash rental rates are expected to drop 5-10 percent in each of the next three years.

Source: Purdue

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