Though investments in U.S. farmland are still competitive with alternative investments, economists at Rabobank think looming interest rate increases and falling commodity prices could be foreshadowing an end to the high land price era.
"We'll likely see lower commodity prices this year, but they aren't going to be low enough long enough to substantially impact land values over the coming year or so," Rabobank's Food and Agribusiness Research and Advisory senior analyst Sterling Liddell says. Liddell authored the recent report, "Land Values Peaking Out – But Not Down."
He says in the short term, strong farmer balance sheets and high rental rates will support current land price levels. However, decreasing commodity prices will keep the values from accelerating as rapidly as they have been.
Interest rates a factor to watch
In the medium term, the single greatest risk to U.S. agricultural land values is looming higher interest rates, Liddell says. Interest rates have been increasing through the first half of 2013, but based on the current Federal Reserve policy, a significant increase isn't expected until 2014 or 2015.
"We are entering an era where planning how you're going to pay for your land is likely to become as important as planning for marketing your crop," notes Liddell.
The report forecasts a decline in land values in the central U.S. by 15-20% over the next three years. In the Western and Southeast U.S., the decline will less noticeable than in the Midwest. Liddell says while an increase in interest rates will have a similar impact on agricultural land values throughout the country, the amount of change will depend on the type of crop production and proximity to urban areas.
Vernon Crowder, also a senior analyst with FAR, says agricultural land values in the West are expected to move in the same direction as those in the Midwest.
"The changes seen in land values in the West, especially those in California, should be less dramatic than that of the rest of the country," Crowder says. "This is due in large part to the diversity of crops grown in the region."
The West is different than other regions because land use for specific purposes – say, orchards or vineyards – could be more susceptible to factors outside the interest rate. Specifically, the U.S. dollar can play a large role in Western land values, because many crops in the region are exported, and a stronger U.S. dollar will have a negative impact on exports.
In the Southeast, only a marginal increase in irrigated farmland values has been recorded. Florida in particular is facing many challenges such as weather, disease, increased competition from imports and the struggling housing market.
Rabobank analysts note that expected increases in interest rates and declines in major cash commodities will lead to a difficult medium term, especially if commodity price declines lead to a reduction in land rents.