Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will Farmland Values Keep Booming?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will Farmland Values Keep Booming?

Article excerpt

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Lean supplies, strong export activity, and vibrant demand both at home and abroad have pushed crop prices to record highs, offsetting today's spiraling production costs. As a result, farm profits and investments have soared, and farmland values have boomed.

But commodity markets in agriculture can change directions abruptly-and so agricultural bankers and farm analysts naturally question the sustainability of today's prosperity. The current agriculture boom is strikingly similar to those of the 1970s and mid-1990s, when the good times quickly faded as crop supplies increased, the dollar strengthened, and export activity weakened. One particular danger is that rising farmland values could be accompanied by greater financial leverage, increasing the industry's vulnerability to a drop in income, as in the 1980s.

This article discusses current farmland value trends and analyzes the factors underlying the recent surge. section I compares the current run-up in farmland values with past agricultural booms. section II explores the financial aftermath of previous booms. section III explains the economic rationale for current farmland values. section IV explores how unexpectedly higher input costs and lower crop prices can cut farmland values. The article concludes that the recent surge in farmland values tracks expected gains in crop returns. At the same time, however, an unexpected surge in production costs or a drop in crop prices could undercut farmland values and pose a financial risk to the farm sector. Thus far, however, the industry's debt levels are up only modestly, helping to mitigate the risks of a drop in farm incomes.

I. WHAT IS DRIVING HIGHER FARMLAND VALUES?

In 2007, farmland values soared, posting record gains in many regions of the Corn Belt. Lean crop supplies, strong ethanol demand, and vibrant export activity fueled by robust foreign economies and a weaker dollar have led to a spike in crop prices. Crop prices continue to soar in 2008, quickly translating into surging farmland values. The record farmland value gains, fueled by robust crop demand and lean supplies, are remarkably similar to the gains of past agricultural booms before debt accumulation undermined the financial health of the farm sector.

Farmland values surge

Over the past year, farmland values across the country have posted record gains. According to Federal Reserve surveys, farmland values are up more than 15 percent from a year ago. In the Kansas City Federal Reserve District, nonirrigated and irrigated cropland values in 2007 jumped 21 percent, the largest annual gain in survey history (Chart 1).' These gains have persisted through the first quarter of 2008. The Chicago Federal Reserve District also posted strong gains, with cropland values in 2007 rising 15 percent. Bankers in the Minneapolis, Dallas, and San Francisco districts have also reported surging farmland values.

Entering 2007, gains in farmland values were already brisk due to robust ethanol demand. The price of corn, the leading feedstock for ethanol plants, doubled and market competition for planted acres led markets to bid up prices for other crops. The strongest farmland value gains emerged in corn-producing regions where ethanol production was expanding. In the Kansas City District, farmland values strengthened first in Nebraska, where farmland values within 50 miles of an ethanol plant rose more than 30 percent over 2006 (Henderson and Akers; Henderson and Gloy). In the Chicago and Minneapolis districts, cropland values rose most sharply in western and north central Iowa, western Illinois, central Indiana, Minnesota, and South Dakota-in other words, in places where ethanol production was concentrated.

Throughout 2007, farmland value gains accelerated as crop supplies stayed lean and export demand pushed crop prices to record highs (Chart 2). After the fall harvest, world crop supplies dwindled further. …

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