Good news for US farmland owners – the retreat in values looks
more like that in the Great Depression than it does the 1980s' decline.
At least, to go by values in the Midwestern agricultural
powerhouse of Iowa, the top US corn and soybean-producing state.
Iowa State University, in an annual farmland price update
for the state, said that prices had fallen by 5.9% this year – the first time
since the 1980s that values have fallen for a third successive year.
The drop in prices - to an average of $7,183 per acre, down
17.6% from their 2013 peak – has left many people "concerned about a potential
farmland bubble burst", the university said, citing the dent to values from recent
US political and economic developments, besides weak crop prices.
"There are legitimate reasons to be cautious, especially
with the rising uncertainty in agricultural exports and likely rise in interest
Indeed, many observers are expecting the Federal Reserve on
Wednesday to raise the key US interest rate by 0.25 points, in the face of
falling unemployment and firm US economic growth.
'It is not unwarranted
to be worried'
Furthermore, "there is a concern for some producers over
possible financial difficulties due to continually declining income and
accumulation of debt from banks and other sources".
Wendong Zhang, the Iowa State University associate economics
professor in charge of the survey, said: "For a pessimist, there are reasons to
worry, especially for landowners and/or producers who are over-leveraged."
Iowa farmland prices
Down 5.9% in 2016
Down 17.6% since 2013
Up 7.1% over past five years
Up 124% over past 10 years
Up 227% over past 20 years
Source: Iowa State University
"It is not unwarranted to be worried… Farmers and land
owners who bet on the high commodity prices lasting and aggressively expanded
or borrowed heavily will face significant problems."
Indeed, it looks like the correction in prices is not over
yet, with Dr Zhang cautioning that "looking ahead, land values might continue
to adjust downwards in the next year or two", a performance which would be "consistent
with the stagnant corn and soybean futures prices and potential rise in
Further price drops in 2017 and 2018 would see the current
price retreat match, in terms of length, the decline in values in the 1980s, when
Iowa prices dropping continuously from 1982-86.
However, in value terms, there was cause to believe that the
current retreat will not match that of the 1982-86 period, during which Iowa
prices slumped by 64%, in a decline fuelled by a sharp rise in interest rates
at a time of elevated farm debts.
"Iowa farmland values do not appear to be in a speculative
bubble that caused the dramatic declines in the 1980s farmland values or the
urban real estate market in the mid-2000s," the university said.
"Farmers accumulated much more income, especially cash,
during the most recent decade" than they did during the previous two "golden
eras" for land prices, in the 1910s and 1970s.
"Farmers used to be able to borrow up to 85% of inflated,
market-based land value in the 1970s, while now they can only get less than
half of cash-flow based land values.
"It appears most farmers will be able to weather the storm
as the market prices find a new equilibrium."
Great Depression vs
The likely outcome is that downward pressure on farmland values
"will continue and play out next year and beyond, but it will more than likely
be a rational and modest correction as opposed to a sudden change".
The current scenario appears more like the extended and
relatively gentle drop in land values which started in 1921 and extended into
1933, in the midst of the Great Depression, than the "dramatic collapse" of the
"We might see this farm downturn resemble the trajectory of
the 1920s farm crisis in the sense that there might be a long, drawn-out
decline in the farmland market."