As farmland values soar, so do fears of a price bubble

Flush with cash, farmers and investors have driven up farmland values this year at breathtaking rates — a 12% gain nationwide and more than 20% in three Farm Belt states. “Given recent experiences with fluctuations in the broader economy and prior farmland price dynamics, many market participants express concern that the rapid increase in farmland prices is a signal of a speculative bubble,” said three Purdue University economists.

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While two-thirds of the agricultural professionals who took part in Purdue’s annual land-value survey said prices for top-quality farmland in Indiana were too high, 27% of respondents said they expected prices to climb higher still this year and through 2027.

Although bubbles are relatively easy to describe — occurring when the price of land exceeds its income potential — they are difficult to measure, wrote the economists in the quarterly Purdue Agricultural Economics Review. They applied two yardsticks to Indiana prices: a comparison of land prices to the capitalized returns from cash rents, and a “double-question survey” of market expectations developed by two University of Southern California scholars to identify asset bubbles.

“A relatively simple (mathematical) model based on current discount rates and cash rents suggests that 2022 farmland prices are greater than can be justified by market fundamentals,” wrote economists Todd Kuethe, Mohammad Daudzai, and Pete Drost. The double-question survey of professionals found concern over high land prices coupled with an expectation of modest further increases.

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“For future increases to be justifiable, farmland returns would need to increase or discount rates would need to decline,” they wrote. “Most economists expect interest rates to continue to increase as a result of inflationary pressure and economic uncertainty. Thus, for farmland prices to remain at record-high levels, farmland returns would have to increase in tandem with interest rate increases.”

There are limitations in the tools used to analyze the land market, said the three economists. For example, mathematical formulas can obscure the varying factors that influence individual sales, and there are many ways to measure the income potential of land. The double-question survey is a subjective measurement. Still, “over a quarter of all respondents have expectations consistent with farmland price bubbles,” meaning they expected price increases although they thought land was overpriced at present.

In the Purdue survey, professionals including farm managers, land brokers, rural appraisers, lenders, farmers, and USDA county directors reported increases of just over 30% in the value of top-quality and average farmland from 2021.

The annual Land Values report from the USDA listed increases of 10% or more in 19 states since 2021. The largest increases were 25.2% in Kansas, 21.4% in Iowa, and 21% in Nebraska. With a 12.7% increase, land values in Illinois soared by $1,000 an acre in one year and 25% in a decade.

Concerns are raised frequently over farmland values and price bubbles. The backdrop is often the agricultural recession of the mid-1980s, the hardest time in living memory for most farmers, when the average value of U.S. farmland plummeted 27% in five years. It was 13 years before values regained their pre-recession levels. Land accounts for 80% of farm assets.

The recent, pronounced surge in land values “has been supported by a combination of high incomes and high farm liquidity,” with inflation and interest rates as recent risks, said Kuethe. In the 1980s, the Federal Reserve raised interest rates to stamp out inflation at the same time that commodity prices and farm income fell.

“Hold on to your hat,” said one participant in the Purdue survey. “As a lender in the 1970s, we thought we were making 50% loan-to-value mortgages, which turned out to be 90% in (a) short time because income fell and interest rates spiked.”