For the past 12 months, the word most commonly used to describe farmland values is: stable. Prices vary by region. But overall prices have leveled off in most areas, after rising steadily for several years.
“I don’t foresee any reason that will create a radical departure from where we are now,” says Bruce Sherrick, a University of Illinois professor of agricultural and applied finance and director of the TIAA-CREF Center for Farmland Research. “The markets are incredibly rational right now.”
To analyze farmland prices, Sherrick suggests considering what a rational investor would be willing to pay for the potential from an asset, relative to the riskiness of the income stream over time. For farmland, he watches the 10-year constant maturity interest rate or CMT-10.
“The 10-year treasury turns out to be a reasonably good index for the rent-to-value ratio of long-duration assets,” he says. “For farmland, it provides a nice way of simply explaining to people and showing how it performs an asset.”
The graph below compares a plot through time of the 10-year treasury notes and the ratio of cash rent to underlying value of farmland based on aggregate USDA data.
“Two periods are interesting to focus on,” Sherrick says. “First, during the period from about 1978 to 1984, there was a stark departure between the CMT-10 and the rent-to-value ratios of farmland in Iowa, Illinois and Indiana suggesting that land returns were out of line with their capitalized values. Near the end of the period shown, the CMT-10 is actually below the rent-to-value ratios, although the movements in the CMT 10 since the end of 2017 have moved them back into a similar range.”
(Sherrick, along with his University of Illinois colleague, Gary Schnitkey, provide more detail in their farmdoc daily piece, Illinois Farmland Values in Context)
Looking forward, Sherrick says policy changes, farmer income, cap rate changes and interest rates will all influence farmland values. Farmland returns show consistent positive correlation with inflation, so that will also be important to watch.
“I wouldn’t be shocked to see the farmland market do a bit of a recovery in the next five years,” he says. “I also wouldn’t be shocked to see additional decline. I don’t see anything that will fundamentally alter and create a breakpoint in the path in either direction.”
Find more tools to analyze and index farmland values at farmdoc daily.
Sherrick spoke at the recent 2018 Emerging Issues in Agricultural Lending conference in Columbia, Mo.