What is in this article?:
The 2014 Buyer’s Forecast from Farm Industry News offers insight into the projected prices for seed, crop protection, machinery, fertilizer, land and financing this week. Here we look at farmland prices for 2014.
About that bubble
The last farmland bubble in the mid-1980s was something experts saw coming, and mortgage payments outpaced rental rates. The mortgage on land is a reflection of two things, Liddell explains: the value of the land and interest rate. A look at interest rates, rental rates and land values, combined with underlying debt on land, doesn’t indicate a bubble, he says.
“That doesn’t mean that we won’t have a land value adjustment downward,” he says. “If interest rates increase and we don’t see values increase, and you start to see a separation between payments and rent, then you could start to fear a bubble in the market.”
Rental rates are likely to remain stable in 2014, but if commodity prices slide further, there will be pressure by renters to have landlords adjust rates.
Brent Gloy, an agricultural economist at Purdue University, is looking at interest rates. This is a critical variable for land values going forward. So far the Federal Reserve has affirmed its current low interest rate approach to pump up the economy.
“There’s pressure eventually, largely depending upon how well the economy rebounds, and it’s not certain that interest would take right off [in a recovery],” Gloy says. He notes that the latest Federal Reserve Open Market Committee report was clear that interest rates would stay low for some time.
In the long run, what will matter, Gloy says, is the earnings and the present value of future earnings off that land. “No one in 10 years will care what you paid for that farm,” he says. “Just because you buy it for cash today doesn’t mean it won’t go down in value. Land purchases at prices above what earnings will support are a consumption decision as much as an investment decision.”
Going into 2014, a sharper pencil will be needed to evaluate land purchases. Such an opportunity may be right if you’re growing your farm business.