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Capitalized values were calculated for each year between 1970 and 2010. These capitalized values then were compared to land prices by calculating price-to-value ratios. A price-to-value ratio equals land price divided by capitalized value. A price-to-value ratio equal to 1 indicates that land price equals capitalized value. Price-to-value ratios above one mean the land prices exceed capitalized values.
Capitalized values were calculated for each year between 1970 and 2010. These capitalized values then were compared to land prices by calculating price-to-value ratios. A price-to-value ratio equals land price divided by capitalized value. A price-to-value ratio equal to 1 indicates that land price equals capitalized value. Price-to-value ratios above one mean the land prices exceed capitalized values.
 
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FDIC chair warns of possible farmland bubble

Sheila Bair says U.S. farmland prices could be the next financial market bubble at risk.
John Hawkins 
Published: Oct 19, 2010
U.S. farmland could be the next asset bubble at risk for bursting, a leading banking regulator said on Monday.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., said it was important to monitor U.S. farmland values for signs of instability like the price bubbles in the housing and stock markets that burst with disastrous consequences for many investors.

Farmland values remain 58 percent above their 2000 levels in inflation-adjusted terms. Investors have been snapping up high-quality land in the Midwest where row crops like corn and soybeans are grown as well as orchards for high-priced nuts and
berries along the U.S. West Coast.

While commercial and residential real estate prices have fallen sharply, farmland valuations have remained strong during the recession. But Bair said those "positive fundamentals" could change.

"A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks," Bair said in a speech delivered to a risk management group in Baltimore.

Illinois land values in line

Meanwhile, the University of Illinois' Gary Schnitkey says Illinois farmland prices have not fallen during the recent troubled economic times. This has led to questions on whether farmland prices will have large price declines similar to those experienced by many stocks during 2009 or by farmland during the 1980s.
 
Schnitkey says current evidence suggests that land price declines are not likely in the near future.
 
"Before a large farmland price decline will occur, farmland returns likely will have to decrease or interest rates will have to increase," he says. "Either could occur, but neither seems likely in the near future."

Over the next year, Schnitkey says farmland returns are likely to increase because of above average commodity prices. Interest rates increases do not appear likely within the next year or two as the Federal Reserve seems intent on implementing more quantitative easing. In the longer-run, however, interest rate increases could occur, leading to declining farmland prices.

We have a podcast with Gary Schnitkey, plus more on this issue at Farmdoc.


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