WASHINGTON, D.C. – Cropland prices in Kansas jumped 20 percent from the last quarter of 2009 to the last quarter of 2010, 18 percent in Iowa and 23.7 percent in North Dakota.
As a result, agricultural economist Jason Henderson can’t help wondering if there is a land price bubble in the Great Plains and the U.S. Midwest.
“Are we setting ourselves up for some kind of correction?” the Federal Reserve Bank of Kansas City vice-president and Omaha, Nebraska, branch executive said during a mid-April speech to members of the North American Agricultural Journalists annual meeting in Washington, D.C.
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Henderson, who monitors agricultural land values and rural development for the reserve bank, said land in parts of the Midwest is creeping toward $10,000 per acre.
“Irrigated cropland in eastern Nebraska is selling for $8,500 per acre.”
Henderson said cropland prices in Kansas have increased 60 to 70 percent over the last five years. Nonirrigated land in the state now sells for an average price of $1,600 per acre.
He said escalating land values are based on the assumption that interest rates will remain low and commodity prices will remain high for a lengthy period of time.
However, Henderson questions both assumptions.
He said land values are determined by a basic equation: expected revenues from the land divided by the capitalization rate.
“Your capitalization rate is the opportunity cost of investments that you have to give up to own land,” he said. “If 10 year (bonds) are seven percent, then your capitalization rate is seven percent because that’s what you have to give up.”
Expectations of return on investment are lower during times of low interest rates, which means capitalization rates are below normal levels.
“Historically, the capitalization rate is about seven percent on farmland…. Today, (it) is about four percent,” he said.
“So the way we’re looking at it … farmland values could have a correction of about 33 percent (if interest rates and capitalization rates returned to normal).”
Interest rates are unlikely to remain at rock bottom for much longer, Henderson said, considering that the U.S. Federal Reserve has kept short-term lending rates at near zero since the economic crisis in late 2008.
“I think there are going to be some changes in interest rate policies.”
In addition, farmers may hope the record grain and oilseed prices of the last few years are here to stay, but Henderson said that isn’t realistic when the long-term outlook is considered.
“The USDA outlook forecast has average annual corn prices falling to $4.10 a bushel in 2013,” he said.
Canadian farmland values haven’t jumped as much as they have in the U.S., but the increases are substantial.
Saskatchewan and Manitoba values rose 37 percent from August 2007 to August 2010, according to Farm Credit Canada, while Alberta prices increased 30 percent.
However, FCC spokesperson Rick Sprott in Manitoba said he hasn’t heard talk of a cropland price bubble in the province.
Henderson said farmers are buying most of the available cropland in the Great Plains and U.S. Midwest, but they may soon have additional competition because more investors want to include cropland in their financial portfolios.
“It (interest) is still building. I’m still getting calls, the last six months, from Manhattan, Los Angeles, asking about farmland values,” he said.
“Everybody is looking at it in terms of an alternative investment …. Prices at auction are still rising. We’re hearing reports that it’s not uncommon in north-central Iowa (for land to sell) at $10,000 per acre.”
Corn futures on the Chicago Board of Trade hit a record $7.84 per
