While we have definitely seen certain sectors of the farmland real estate industry hit hard by the tough economic times we are in (see: Recreational Land), the demand for high-quality Midwest row-crop land appears to be as strong as ever. Sales in East-Central Illinois continue to be in the $6,000 – $7,000 per acre range and there have been sales in Western Illinois for over $8,000 per acre. However, with any market, there are going to be ebbs and flows. A recent article by DTN/Progressive Farmer analyzes a few factors hat could negatively affect farmland values in the future. Read the full article – What Could Burst Land’s Bubble?
The author looks at 2 possible factors – Multiple consecutive years of low farm income and increasing interest rates. If a situation were to occur, whether it be a natural disaster, a decrease in demand for corn based products (e.g. Ethanol or high-fructose corn syrup), or simply the fear of the unknown, where commodity prices languished at low levels for many years, this would eventually negatively affect land prices. At lower commodities prices, farmers will not be able to continue to pay at the same levels of rent payments. With lower rent payments, the landlord’s return on his/her property is going to be lower, which will finally affect the farm ’s value.
The situation that the author lays out with regards to interest rates is that if interest rates increase, credit may become harder for some farmer-landowners to acquire all the necessary credit to continue their operation.
While neither of these situations appears very likely today, it is always wise to seek out possible weak points in the market so that we as investors can be prepared as best as we can.
What are your thoughts on where the farmland market currently is and where it may be headed?
Tags: credit, ethanol, farmland, interest rates, land market, land value
