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California farmland prices not a bubble risk

Agriculture land prices in California and the rest of the country have increased steadily over the last decade, leading experts and landowners to question whether the high values are sustainable.

Agriculture land prices in California and the rest of the country have increased steadily over the last decade, leading experts and landowners to question whether the high values are sustainable.

The short answer from Rabobank’s Food & Agribusiness Research and Advisory (FAR) group is that the land value rates are not a speculative bubble, but a decrease in land values over the next several years is a definite possibility.

The FAR group’s research concludes the steady increase of agricultural land values over the past five years is not linked to speculation or other factors that traditionally lead to a bubble. In California, much of the increase in land values is fueled by growing global demand for tree nuts and some fruits. The report finds these demands and other factors to be sustainable. However, the research also points to factors that could combine to drive a decrease in land values over the next decade. If land values do adjust down over the next three to seven years, the reduction in value will be moderate and not a crash.

The findings are based on the FAR team’s global agribusiness marketplace report, “Blowing the Farmland Bubble.” As the leading provider of financial services for the global food and agriculture industry, Rabobank created and maintains the FAR unit to conduct ongoing research and analysis on issues of importance to agriculture around the world. Rabobank provides this exclusive information to its client producers and agribusinesses in the U.S.

According to the report, the drivers behind the increase in the value of crop land since 2005 have been a combination of increased commodity prices, low interest rates and a limited supply of land available for sale. Over the past five years, productive agricultural land value in the U.S. has grown at an average rate of between 20 and 70 percent, with the most significant growth in areas producing intensive field crops or livestock.

Co-author Vernon Crowder, vice president and agricultural economist of the Food & Agribusiness Research Advisory Group, says a crash is unlikely because current trends in the U.S. are driven by fundamental economics and moving more heavily toward the long-term investor. “Drivers of bubbles tend to be buying and selling by speculators. The increasing presence of farmers on the buyer side of agricultural land combined with a tight supply of land available for sale, provides significant evidence there is not currently a speculator-fueled bubble.”

Crowder notes that another year of strong margins combined with the anticipation of continued tight supplies should drive land prices higher for at least one or two more years. “On a longer term basis of three to seven years, the probability of land values adjusting negatively outweighs the possibility of a continuous upward trend.”

Several factors may affect the price of land over the next decade. The largest risks include the trend toward absentee farmers as land owned by aging farmers changes hands to non-farming heirs; interest rates; global commodity supply and demand; water availability and, new environmental restrictions; reduced farm margins; biofuels policy and inflation.

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