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Are Farmland Prices Headed Towards A Plateau?

Are Farmland Prices Headed Towards A Plateau?

Economists say cropland price appreciation is slowing, but declining crop prices could be primary driver behind land values

Farmland prices seem to be starting to plateau in the Mid-South and Southeast regions of the U.S., according to the latest Farmland Market Survey released by Farmland Investor Letter.

Prices may be slowing also in the St. Louis and Kansas City districts of the Federal Reserve – both groups released reports last week signaling slower farmland markets.

For the Farmland Market Survey, non-irrigated cropland values rose at a 7% year-over-year pace, falling from 9.3% in Q4 2012. Irrigated land and pasture values were also up 8.2% and 2.5%, respectively, though not reaching Q4 levels of 9.6% and 3.2%.

Economists say cropland price appreciation is slowing, but declining crop prices could be primary driver behind land values

Kansas City Federal Reserve Bank's Nathan Kauffman and Maria Akers report similarly that values are still climbing, but the pace is slowing. In the Kansas City district states of Kansas, Missouri, Nebraska, Oklahoma and the mountain states, ranchland values are strengthening the most, a market driven by the prospect of improving livestock profitability.

Though investors expect cropland values to remain stable through Q2, continued stock market gains may give investors something else to consider, which they say could factor into an eventual stagnation of prices.

However, respondents are optimistic for irrigated cropland tracts, where 48% expect prices to increase, while 52% look for no change. Investor demand for irrigated tracts appears strongest in Louisiana and Arkansas where 78% and 74%, respectively, of respondents look for irrigated land values to continue rising.

Despite some rumblings of a farmland bubble, University of Missouri agricultural economist Ron Plain said last month that the most recent significant bubble of the 1980s had many different factors that came together to form a big problem. But in the current situation, he doesn't see that happening soon, mostly because farmers aren't relying as heavily on borrowed money.

"But my prediction is we'll set new record in values in 2013 and we'll sell more land, so that leverage number is likely to increase," he said. "Keep an eye on that if you are bidding for land. And by all means, stay away from variable-interest-rate loans. When you are at a 60-year low in interest rates, you can bet the next big move is going to be up."

However, much like the KC Fed and Market Survey respondents, he said declining crop prices will be the factor to watch.

"If you combine falling crop prices with rising interest rates, we could see a decline or at least stabilization in farmland prices very quickly," Plain said.

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