Brent A. Gloy
With commodity prices tumbling one of the key supports for sky high farmland values is changing rapidly. As economic returns in the farm sector fall, we should expect that the other key driver of high farmland prices, low interest rates, will come into much greater focus. Even with elevated profitability of recent years, capitalization rates on farmland have steadily drifted lower, meaning that the ratio of current income to farmland prices has fallen. In other words, farmland prices have grown more rapidly than current income. While this has made sense in a growing income and falling interest rate environment, this trend may be approaching its limit. Continue reading
By Brent A. Gloy
Farmland values should reflect the expected present value of the future earnings that the farm might generate. This sounds nice in theory, but requires that one make forecasts of the present value of future farmland earnings, something that is inherently difficult to do well. Understanding how people think about this has been something of an obsession for me. We have asked many different people questions about their estimates of farmland values and forecasts of future earnings and have been surprised to find the lack of a strong positive relationship between these variables.
Recently, the USDA long-range commodity price baseline projections caught my eye. I generally pay little attention to the baseline as it is not really meant to be a forecasts of the future, but rather what the future might look like if today’s conditions persist over the next 10 years. However, I also realize that in order to come up with an estimate of the expected value of future earnings we must be able to say something about future prices, yields, and costs, all of which the USDA considers, so we decided to give them a second look.