Between high commodity prices, low interest rates, limited supply and a perception of safety, farmland prices are shattering records. One Iowa survey found a 33% increase in land values, while the Kansas City Federal Reserve reports that land in its district was 25% more expensive than last year.
Cash rent auctions are another sign of the times, generating reports of $500 per acre or higher rental arrangements in Illinois.
"We're not at the point of 'irrational exuberance' yet," University of Illinois ag economist Gary Schnitkey told DTN's Elizabeth Williams recently. "I don't think we've hit the high. There's a lot of momentum out there."
That bullish momentum starts to raise red flags.
"Anytime everybody gets so confident in grain prices, that scares me," says Steve Bruere, president of People's Co. "It's hard to remember how low commodity prices can go. Just two years ago, in February 2020, corn prices were $3.30 per bushel, and soybeans were $8.17 per bushel."
What goes up must eventually come down, but will the market crash as dramatically as it has climbed?
While there are parallels to inflation in the 1970s, farmers have much less debt, making a 1980s-style crisis unlikely. Jackson Takach, chief economist at Farmer Mac, said in the 1980s that for every $1 of farm earnings, about 33 cents was spent on interest. Today, it's more like 12 cents on average.
"Farm balance sheets have a lot of room to absorb higher interest rates," he says.
While interest rates may not force a lot of bankruptcies, they might slow the rise of farmland prices. In low interest rate environments, investors generally don't mind paying a little more to acquire land, but when interest rates rise, their opportunities shift. The Federal Reserve anticipates raising rates six more times this year to tamp down inflation.
"We've seen periods of time when land values continue to appreciate in rising rate environments, and it's tied to farm income. When you have really strong commodity prices and strong profitability, those two things can overwhelm a rise in interest rates. I think it has the potential to be true this year," Takach adds.
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