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.