Tuesday, October 19, 2010

Round Two: A University of Illinois Report Concludes that we are not in a Farmland Price Bubble

OK, So I am Crazy, But so is Sheila

Yesterday, I posted my article, "Farmland Bubble Warning; So Maybe I'm Not Crazy After-all Because I was Beginning to Wonder" containing the Sheila Bair warning that the central bankers are watching farmland closely as they think it might be the next bubble, and reiterated some of my present and past concerns.

Today, I'd like to follow-up with an analysis coming out of the University of Illinois by Gary Schnitkey, who concludes that farmland prices are not a bubble and an appreciation of 3% next year would be in line with current conditions. His number one concern for downward pressure on farmland prices is the potential for (perhaps rapid) interest rate increases. His second main concern would be a decrease in farmland returns. He doesn't see either in the short term.

In his statistics and graphs, the one sounding some warning bells was the fact that farmland prices have increased faster than cash rents since 1987. Schnitkey states, "In essence, the return on which farmland price is based is becoming a less of a percent of farmland price."


The next key paragraph is in Schnitkey's conclusion:
At this point, farmland returns and cash rents appear to be under no downward pressure over the next several years. In fact, recent commodity price increases likely will cause cash rents to increase. These rental increases may support farmland price increases over the next several years. Farmland price increases in the 3% range over the next year would cause prices to still be in line with capitalized values.

I appreciated the work by Schnitkey, yet, I'd like to comment on a few concerns that I have that he didn't mention:
  • Our current global deflationary position still makes commodity prices vulnerable to falling, even this coming year and more, even given their strength at the time being.
  • I expect volatility in commodity prices as well as the dollar's value over this next year, or two, or three. Will farmland prices remain strong under volatile conditions?
  • I continue to remain open to the possibility of a stronger dollar over the next year given the event that European debt problems escalate again which would be bearish for U.S. Ag commodities.
  • Policy renewal (or not) of the corn ethanol subsidy will help determine corn prices next year. That is still an unknown which we cannot assume.
  • The possibility of higher crude/energy costs.
  • Governmental shifts towards austerity could cut current farm supports, especially dependent upon outcomes of upcoming elections.
  • There continues to be a farmland investment frenzy going on which is putting positive pressure on land values.
All in all, this is a timely study, and one that many are interested in. I highly recommend reading the whole report.


With Stu Ellis's version here: Land Prices: Are They Going Up or Down?

(h/t Stu Ellis)