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Wednesday, October 21, 2015

2016 Farmland Price Outlook

2016 Farmland Price Outlook
Todd Kuethe, Agricultural Economist - University of Illinois

While farmland prices likely will continue to see downward pressure into 2016, the capitalized values do not suggest the price of farmland is too high or in a bubble. Todd Gleason has more from the agricultural economists at the University of Illinois.

Three agricultural economist at ILLINOIS have written…
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Three agricultural economist at ILLINOIS have written an article about the value of farmland for the Farm Doc Daily website. It, in simple terms, says two things. First, the price of farmland is not too high, or even in an economic bubble. Secondly, the downturn in commodity prices does not point to a situation like the farm crisis of the 1980s. Here’s one of the co-authors of the article, Todd Kuethe.
Kuethe :41 …those movements always getting pushed down the line.
Quote Summary - So the two parts to that are, first, obviously cash rents. Which we expect to come down as incomes decline. Although the rental market is relatively sticky. It does not move as fast as income in aggregate moving. So, we expect to see downward movement, but not a bottom-falling-out drastic movement in cash rental rates. The second side is the interest rate. The Federal Reserve continues to state it expects to raise rates in the future, with those movements always getting pushed down the line.
Kuethe and his colleagues used the capitalization value to make their assessment. They say small increases in interest rates could have a dramatic impact on capitalized value. Because farmland is a long-lived asset, farmland faces larger potential price decreases than other assets if interest rate increases occur that translate to changes in the real capitalization rate. On the other hand cash rents would have to fall considerably before the capitalized value is below the current farmland price. This is because while farmers actually held the line on what they paid for farmland, cash rents did not hold that same line. Farms, for a while, were worth more than the top prices, but cash rents rallied most of the way. Those can drop back and not have any effective impact on the underlying value of the farm. Here’s what Todd Kuethe thinks will happen in 2016.
Kuethe :24 …as fast as the appreciation was leading up to it.
Quote Summary - I think we will continue to see downward pressure. Those declines will be slight and within a few percentage points. We won’t see a corrective response that is as fast as the appreciation was leading up to it.
It being the new higher price of farmland. You may read more on the Farm Doc Daily website.