US land prices drop for first time in four years

US farmland prices have fallen for the first time in four years, undermined by weakness in agricultural commodity prices evident in a drop in wheat prices to 18-month lows this week, while corn stands near three-year lows.

A farmland price index compiled by Creighton University weakened to 47.0 this month, from 54.3 last month, and below the 50.0 level which indicates a static market.

."This is the first time in four years that the farmland-price index has moved below growth neutral," said Creighton economics professor Ernie Goss.

"As agriculture commodity prices have moved lower, so have farmland prices."

'Razor thin margins'

Indeed, the decline, the first since December 2009, comes amid growing ideas of the dent to farmers' spending power as grain prices fall well below historic highs

"If you haven't done so yet, get your pencil out on 2014 crop breakevens. Margins will be razor thin," Mike Mawdsley at Iowa-based broker Market 1 said.

Professor Goss said: "Over the past year, grain prices have declined by roughly 35%," adding that this decline has also "significantly reduced farmers' willingness to purchase agriculture equipment".

A farm equipment market index run by Creighton, which takes its data from states from Illinois to Wyoming, fell by 4.0 points month on month to 44.3, the lowest reading since August last year.

'Fasten your chin straps'

Of lenders surveyed by Creighton, 81% viewed lower agriculture prices as the top threat to the rural economy for next year.

Jeff Bonnett, president of Havana National Bank in Havana, Illinois, said that next year "will be interesting, as input costs have not come down in relation to commodity prices.

"Fasten your chin straps firmly and hold on, it may be an interesting ride."

Regional variations

The farmland market was weakest in Minnesota among states surveyed by Creighton, with an index figure of 40.9, with Kansas, Nebraska and Illinois among other states showing declining prices.

However, prices are still growing in the likes of North and South Dakota, in Colorado and Missouri.

And the market weakness follows a sustained period of price rises which has taken values to record highs, up more than 70% in the past three years, according to US Department of Agriculture data.

The extent of the price gains has provoked concerns of a collapse in values ahead, as seen in the 1980s after the last strong rally, when soaring borrowing costs wrong-footed many farmers.

However, many observers feel that, with US interest rates expected to remain low, the downside to land prices is limited.

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