If Corn Drops a $1, How Much Does Farmland Prices Drop?

AgriBank, which is owned by 17 affiliated Farm Credit Associations primarily located in corn belt states issued a 14 page analysis of farmland values and the effect on these values if commodity prices decrease or interest rates rise.  Their analysis included regression studies and here are some of the conclusions:

1. If net farm income or net cash rent income decreases by 50%, then cropland values would go down by about 33 percent.  This would not be based upon a one-year trend, but would probably take at least two continuous years to lead to these value reductions.
2. For every dollar decrease in corn prices, then crop land values would decrease by $298 per acre.
3. For every 1% increase in long-term interest rates, then crop land values would decrease by $357 per acre.
4. If there is a long-run average of cash rents based upon $4.50 corn and 4% long-term rates, then they suggest there would be a 34% correction in crop land prices.
5. Putting it all together, they estimate if corn remains at current levels and interest rates do not change, then there should be about a 10-12% correction.
6. They estimate it would take two-three years for long-term rates to get back to the 4% plus range.

Falling crop prices and rising interest rates could take several years to be fully reflected in crop land values.  They are also suggesting that a reduction corp prices would not affect farmers like the 1980s.  They are already noticing a leveling off or reduction of top prices across their 15 state region and it will be interesting to see how crop land prices compare at the end of 2014 versus 2013.

We will keep you posted.

Paul Neiffer, CPA