Commodity prices are often cited as the biggest driver of farmland prices… and deservedly so. Without $7.00 corn I doubt that we would see $10,000 land. But let’s not ignore the other big dog in the room, i.e., interest rates. A recent article by Linda H. Smith on dtnprogressivefarmer.com (Time to Reap Cheap Money) provides a good overview of the interest rate market. For example, in the four Corn Belt states served by Farm Credit Services of Mid-America, 20-year farm mortgages are running under 5%. This is a definite boon for those buying land at current prices, and a real opportunity for existing landowners to refinance their debt at lower rates.
Probably the biggest unknown at this stage is how long these low rates will last. Some economists, notably Kansas State professor Allen Featherstone, believe that there will be a small uptick at some point – “Based on an analysis of Treasury yields, the market expects somewhat higher interest rates in the future; it expects inflation to rise, but only by about one percentage point”. Another interesting insight from Featherstone – “When the financial crisis hit in October 2008, five-year Treasury Inflation Protected Securities (TIPS) spiked to four percentage points over inflation. Now, it has collapsed below zero. In other words, traders are paying to hold the money.”
These low rates obviously help borrowers, but they also have drawn investor cash from C.D.s and bonds into the farmland market. When you combine the current interest rate environment with record grain prices, the argument that farmland values are merely a speculative bubble ready to burst seems a bit absurd. In reality, both farmers and investors are buying land for solid economic reasons, not for speculative purposes.
