The Mississippi Land Bank recently held their annual meeting and the President of this organization, Abbott Myers, offered his outlook on land prices. For perspective, the Land Bank has been providing the financing and refinancing solutions for families, individuals and groups who want to purchase rural land and need to finance that purchase for over 90 years. During this time period, they’ve seen the best of times in agriculture, the worst of times, and everything in-between.

As reported in the on-line version of the Delta Farm Press (Farm Land Prices: A correction maybe, not a bursting bubble), Mr. Myers believes that over time land prices will correct themselves – in times when they appear to be too low, ultimately they begin to rise; and in times when they appear to be too high (as many believe they are now), they will correct to a level that can sustained by the underlying profits that the land can generate.

Mr. Myers further cited three variables that he believes will have the greatest impact on land values in the near term:

Commodity Prices. This is the one area where farmers, and the entire agriculture industry, have the least amount of control as the weather will dictate whether the crop size will be smaller than expected (as we saw last year) or larger. As has happened in the past, when we produce too much grain, commodity prices go down, along with profitability.

Interest Rates: The Federal Reserve has signaled that they desire to keep interest rates low through 2015. This not only helps the farmers trying to borrow money, but it also attracts outside money to farmland. These investors are looking for a hard asset with a reasonable annual return, and currently the alternative assets that they would normally invest in just aren’t generating the returns they want.

Government Farm Program: The lack of a new Farm Bill creates some uncertainty for the future. No one anticipates any major changes, though a major shift from direct payments to risk management (a.k.a. crop insurance) is likely. Many lenders prefer the insurance alternative as a way to minimize operating loan risk. However, the costs have to continue to be reasonable or the perceived benefit will not match the expense. Yes, farmers will remember the reduced yields from the drought of 2012, but they’ll also remember that major droughts only occur about every 25 years.

I think that Myers summed it up best with the following thought “the buyers of land the past couple of years have either paid cash, or paid down a significant amount of cash – they’re not borrowing a lot of money for these purchases. I think this is going to help keep prices from falling the way they did in the 1980’s. There may be a correction in farm land prices, but I don’t think it will be a bursting bubble.”