Are Farmland Prices Inflated?

There’s a growing buzz about whether or not U.S. farmland prices will be the next asset bubble to burst. But despite all the talk about the commercial real estate market and how it’s under pressure, when you look at farm real estate it has really held up, even increasing fairly rapidly over the last couple of years.

Characterizing the current farm real estate scenario as a “bubble” may be off the mark, according to John Anderson, an economist with the American Farm Bureau Federation.

“I think it makes sense to define a bubble as prices for an asset that are just too high and not really justified by market fundamentals. If you look at farmland, there are some pretty strong fundamentals in the farm real estate market. Commodity prices are historically quite high and interest rates are very low and those are both factors that provide a lot of strong support for farm real estate values,” Anderson said.

Gary Schnitkey, a University of Illinois agricultural economist, released a paper Tuesday in which he states that farmland price declines are not likely in the near future.

“Before a large farmland price decline will occur, farmland returns likely will have to decrease or interest rates will have to increase. Either could occur, but neither seems likely in the near future,” Schnitkey wrote in his paper entitled Farmland Price Outlook: Are Farmland Prices Too High Relative to Returns and Interest Rates?

(Image: OakleyOriginals)

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