Farmland prices have increased dramatically during recent years, rising in Illinois from $3,640 per acre in 2006 to $7,700 per acre in 2014, according to the USDA's National Agricultural Statistical Service.
While not providing a completely clear picture, recent reports suggest that farmland prices stabilized during the first six months of 2014, with some reports suggesting slight decreases and others suggesting slight increases, University of Illinois Economists Gary Schnitkey, Bruce Sherrick and Todd Kuethe say in a new FarmDoc daily report.
For example: Purdue University reported that land values for average Indiana farmland increased by 7.1% from June 2013 to June 2014, but decreased by 1.9% from January 2014 to June 2014; the Chicago Federal Reserve Bank in its August 2014 AgLetter reported that northern and central Illinois land values increased by 3% between April 1, 2014, and July 1, 2014; and in the Agricultural Finance Monitor released in the second quarter, the St Louis Federal Reserve Bank indicated that second quarter 2014 land values were 3.5% lower than first quarter 2014 values in the Eighth Fed District.
While not identical, none of the reports indicate large changes in farmland prices in the first six months of 2014, the economists say.
Factors that impact farmland prices
The recent performance of farmland prices, and the recent shifts in commodity prices, have led to heightened concern about potential future reactions of farmland markets, the economists say, but in the aggregate farmland market, the majority of the valuation impacts can be summarized by changes in farmland returns and risk-adjusted capitalization rate.
Cash rents provide one meaningful measure of farmland returns. Generally, prospects of permanently increased cash rents lead to increases in farmland prices. Since 2006, average cash rents in Illinois increased from $132 per acre in 2006 to $234 per acre in 2014, representing an increase of 77%.
Corn and soybean prices, however, have decreased from 2010 through 2013 levels, leading to lower returns to farmers. These lower returns will put downward pressure on 2015 cash rents.
If low prices persist for several years, downward pressure on cash rents could continue into 2016 and 2017. Of course, a return to higher commodity prices would relieve this pressure, the economists say.
Continue reading the Farmland Price Outlook in 2014 and Beyond on FarmDoc Daily.