Brimming with cash, farmers and investors have driven farmland values up this year at eye-popping rates — a gain of 12% nationally and more than 20% in three farm belt states. “Given recent experiences with fluctuations in the wider economy and past farmland price dynamics, many market participants are concerned that the rapid increase in farmland prices is a sign of a speculative bubble,” said three Purdue University economists.
While two-thirds of agricultural professionals who took part in Purdue’s annual land value survey said Indiana’s premium farmland prices were too high, 27% of respondents said said they expect prices to rise further this year and into 2027.
Although bubbles are relatively easy to describe – occurring when the price of land exceeds its potential income – they are difficult to measure, the economists write in the quarterly Purdue Agricultural Economics Review. They applied two criteria to Indiana prices: a comparison of land prices with capitalized cash rent yields and a “double-question survey” of market expectations developed by two University of California du South to identify asset bubbles.
“A relatively simple (mathematical) model based on current discount rates and cash rents suggests that farmland prices in 2022 are higher than market fundamentals may warrant,” wrote economists Todd Kuethe, Mohammad Daudzai and Pete Drost. The double question survey of professionals revealed concerns about high land prices, coupled with an expectation of modest additional increases.
“For future increases to be justifiable, farmland yields would have to increase or discount rates would have to decrease,” they wrote. “Most economists expect interest rates to continue to rise due to inflationary pressures and economic uncertainty. Thus, for farmland prices to remain at record highs, farmland yields would need to rise in line with increases in interest rates.
There are limitations in the tools used to analyze the land market, the three economists said. For example, mathematical formulas can obscure the various factors that influence individual sales, and there are many ways to measure potential land revenue. The double question survey is a subjective measure. Yet, “more than a quarter of all respondents have expectations consistent with farmland price bubbles”, meaning they expected price increases even though they thought the land was currently too expensive.
In the Purdue survey, professionals including farm managers, land brokers, rural appraisers, lenders, farmers and USDA county managers reported increases of just over 30% of the value of high and medium quality agricultural land from 2021.
The USDA’s annual property values report showed increases of 10% or more in 19 states since 2021. The largest increases were 25.2% in Kansas, 21.4% in Iowa and 21% in Nebraska. With a 12.7% increase, land values in Illinois soared by $1,000 per acre in one year and 25% in a decade.
Concerns are frequently expressed about farmland values and price bubbles. The backdrop is often the agricultural recession of the mid-1980s, the toughest time in living memory for most farmers, when average US farmland values fell 27% in five years. It took 13 years for values to return to pre-recession levels. Land represents 80% of agricultural assets.
The recent steep rise in land values ”has been supported by a combination of high incomes and high farm liquidity,” with inflation and interest rates as recent risks, Kuethe said. In the 1980s, the Federal Reserve raised interest rates to stamp out inflation at the same time that commodity prices and farm incomes fell.
“Hold on to your hat,” said one Purdue poll participant. “As a lender in the 1970s, we thought we were doing 50% mortgages, which turned out to be 90% in (a) short time because incomes fell and interest rates interest skyrocketed.”