Have Farmland Values Built-in an Interest Rate Rise

The FarmDoc Daily issued a report earlier this week on how interest rates might affect farmland values.  A rise in interest rates usually negatively impacts farmland values or other bond-like investments.  For example, if a farm generates $300 per acre of net income and it is valued at $10,000, this equates to a 3% capitalization rate.  If the investor now requires a 6% rate of return, the value of the farmland would drop from $10,000 to about $5,000 (over time).

The FarmDoc report’s Figure 2 showed how farmland values in Illinois from 1970-2015 correlated to the “expected” farmland value based on interest rates for each year.  During 1970-2011, the correlation between these values were very close.  Actual values were higher in 1978-1985 when interest rates were high and crop returns were low.  This same result also occurred in 2005-2009 when the ethanol boom first started and interest rates had started to rise and then dropped rapidly during the recession.

Beginning in 2011-12, actual farmland values dropped behind expected values based on actual interest rate expectations for values.  For example, in 2012, the expected value of Illinois farmland was about $12,000 and actual values were about $7,000.  Expected values bounced between $9,000 and $12,000 (where they are at now) from 2011-2016, whereas, actual values are currently around $7,000.

Therefore, this indicates that there may be a substantial cushion to farmland values if interest rates do rise.  Investors may have already “built-in” an expected rise in future interest rates and farmland values may not change much until interest rates rise substantially.  Again, this is a theory and only time will tell on the reality.

We will keep you posted.

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  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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