Farmland values are likely to continue their long-term upward trend in 2011 after a brief pause in 2009 and early 2010, according to two university economists who follow land price trends.

“I would say that land will continue to move upward at 4 to 5% a year,” says Mike Duffy of Iowa State University.

But farmland price increases the next couple of years aren’t likely to go much higher than that, says Gary Schnitkey of the University of Illinois. “There is enough wariness out there that it will cap increases,” he says.

Wariness is tied to a sense that this year’s high crop prices won’t last, plus unease about the general economy, he says.

“If we budget corn and soybean returns based on the current price outlook, 2011 looks like a prosperous year,” Schnitkey says. “But today’s prices are likely to come back to the longer-term trend price in a year or so.”

 

Rents higher

Cash rents in 2011 and 2012 are likely to reflect next year’s improved returns, the economists say. “Earlier in the year, we had thought that cash rent was going to be fairly flat, but we have heard more about prices going up this fall,” says Duffy, who has heard reports of final cash rent determination being put on hold during the fall price run-up.

In mid-summer, the Illinois Society of Professional Farm Managers and Rural Appraisers projected that average cash rents would be up $7 to $10/acre in 2011. “That was before $5/bu. corn,” Schnitkey says. “If commodity prices hold, I would think that cash rents would be up more than that.”

 

Thin market, more buyers

Both economists note that the amount of land for sale in 2009 and 2010 fell dramatically from 2008’s relatively active market. The trend is expected to continue into 2011. Meanwhile, outside investors have been showing more interest in buying farmland. The relative stability of farmland investment returns compared to returns from other investments is responsible for both trends, the economists say.

“With poorer returns for other investments, farmland is more attractive,” notes Duffy, who published a study in 2009 comparing farmland and stock market returns. The study showed that an Iowa farmland investment would have returned 4.68% per year from 1960 to 2009 — compared to a 3.2% annual return to S & P 500 stocks.

Many potential farmland sellers have concluded that farmland is the best investment for now. “If an individual has an option of selling now or waiting, they wait,” Schnitkey notes. “If you sold the farmland, where else would you invest the money?”

 

Interest rate fallout

Although the near-term projection for farmland values is higher, Schnitkey warns that today’s historically low interest rates could rise, potentially pressuring the value of land and other assets.

“That’s the biggest risk I see to farmland prices,” he says.

He notes that at the current 30-year treasury bill interest rate of 3.3%, the capitalized value of the average acre of Illinois farmland is $5,000. “If interest rates went back to what they were in 1990, 8.5%, the capitalized value of that acre of farmland would be $2,000.”