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Rebound in farmland prices in key US state 'looks only temporary reprieve'

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The first rise in farmland values in four years in the top US corn-growing state may prove only a “temporary break”, researchers cautioned, warning over a “prolonged downturn” in the farm economy, and the risk posed by Nafta renegotiation.


Farmland prices in the Midwest state of Iowa, which is often the top soybean-producing state too, rose by 2.0% to average $7,326 per acre in the year to November, Iowa State University said.


The rebound, which follows three years over which prices tumbled by 17.6%, tallies with findings from the Federal Reserve, the US central bank, which estimated Iowa land prices as being 2% higher in the July-to-September quarter than a year before.


And more price increases are on their way, according to most of the 710 lenders, farm managers, agricultural professionals and real estate brokers surveyed by the university, with 58% expecting “another hike” in values in 2018.


‘Temporary break’


However, this optimism may prove misplaced, said Wendong Zhang, assistance professor economics at the university, who said that the 2017 “bump” in prices “seems more like a temporary break in a downward adjustment trajectory”.


The low interest rate environment seen as the top reason behind this year’s price gains will “likely” continued to be eroded by Fed efforts to lift borrowing costs, Mr Zhang said, noting rates by agricultural lenders at 5.5%, the highest in five years.


The trend of higher farm loan rates “will likely continue, especially in light of the growing agricultural debt repayment problems experienced at some agricultural banks”, he said.


‘Crucial to watch’


Worsening farm finances may weaken a second pillar to prices, from the “very limited” amount of land which has come to market.


With some Fed surveys showing “continued deterioration in agricultural credit conditions, as a result, the downward pressures on the farmland market are still present.


“If more farmers are forced to liquidate a portion of their assets due to heightening farm financial stress, there will be more land parcels available on the market, potentially allowing the land market to go down.”


It was “crucial to watch” whether this year’s land price increase boosts interest in buying land, or brings “more stressed sales from financially-stressed producers”, Mr Zhang said.


‘Major negative implications’


Furthermore, the renegotiation of North America’s Nafta trade agreement looks particularly significant for Iowa, “one of the few [US] states that have a trade surplus with Mexico”, which is a large importer of corn.


“Disruptions of Nafta could have major negative implications for the Midwest agricultural economy.”


Mr Zhang said that “we might see farmland values continue to recede due to stagnant commodity prices, new uncertainty regarding agricultural trade such as Nafta renegotiations, and possible stress sales from some producers.


“Economic fundamentals suggest that the Iowa farmland market appears to have peaked for the foreseeable future.


“Given the rising interest rates and stagnant farm income, I would not be surprised to see a continued decline in values in the future.”


1920s vs 1980s


However, Mr Zhang also downplayed fears among some commentators of the ag sector downturn “deteriorating into another farm crisis.


“I would argue that despite the growing financial stress across the Midwest over the past few years, we are unlikely to see a replay of 1980s farm crisis,” which was marked by “the sudden, precipitous collapse of the US agricultural land market and mounting delinquent farm loans and foreclosures.


“Our analysis suggests that the trajectory of the current farm downturn will likely be a gradual, drawn-out one like that of the 1920s farm crisis, as opposed to a sudden collapse as in the 1980s farm crisis.”

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