According to USDA and Rabobank, thus far the Corn Belt has been the epicenter of rising value.

The report cautions that with commodity prices approaching four-year lows, land values are now outpacing production returns, giving rise to the possibility of a farmland asset bubble. North Dakota, South Dakota and Nebraska have seen the largest increases, with upwards of 218 percent.

The report indicates that increasing corn, soybean and wheat supplies will continue to drive commodity pricing downward if good yields are achieved in 2014 and 2015. However, input costs, such as chemicals, fertilizers and seed, historically decline at a much slower rate, tightening profit margins.

With tightening profit margins, how will land rental rates be affected?

Sterling Liddell, a Food & Agribusiness Research and Advisory department (FAR) vice president and the report’s author, states, “Due to the negotiability of rental rates, any changes are a critical indicator of the value of land as an economic asset. Thus, rental rates should also provide a guideline for the amount of mortgage payment, which is sustainable under current circumstances. If land values continue to rise despite flat to lower rental rates, it is generally a result of decreasing interest rates that allow mortgage payments to remain competitive with rental rates. Under these conditions, farmers are likely to buy land on debt and gain the benefit of long-term ownership rather than rent. As rates increase, a return to renting over buying will likely have the inverse effect.”

The one key variable in the equation, perhaps more unpredictable than commodity and land value pricing, is interest rates. Recent announcements by Federal Reserve Chair Janet Yellen suggest that increasing interest rates could be on the near horizon. This shift means land values will need to decrease in order to keep mortgage payments competitive with rental payments.

The report indicates that due to cautious buying decisions over the past 12 months, land values have flattened and in some areas declined. A Federal Reserve District survey for the first quarter of 2014 showed either flat-lining or significant slowing in the ag land market. If farmland value is beginning to slow, a collapse in agricultural land values will be avoided.  FG

—Summarized by Progressive Forage Grower staff from cited source