Ag Land Values Not In True Bubble

Land prices likely to adjust down moderately in next decade.

Published on: Jul 7, 2011

A new report says U.S. land prices are not in a "speculative bubble" but may be due for a downward correction.

Rabobank's International Food & Agribusiness Research and Advisory group says its research concludes the steady increase of agricultural land values over the past five years is not linked to speculation or other factors that traditionally lead to a bubble.

However, the research group says factors that could combine to drive a decrease in land values over the next decade. If land values do adjust down over the next three to seven years, the reduction in value will be moderate and not a crash as would be typical after a speculative bubble bursts.

The findings are based on the FAR team’s global agribusiness marketplace report, “Blowing the Farmland Bubble.”

The report says driving factors for the increase in the value of cropland since 2005 have been a combination of increased commodity prices, low interest rates and a limited supply of land available for sale.

In the past five years, productive agricultural land value in the U.S. has grown at an average rate of 20% to 70%, with the most growth in locations producing intensive field crops or livestock.

Sterling Liddell, co-author of the report and vice president of the group, says a crash is unlikely because current trends in the U.S. are driven by fundamental economics and moving more heavily toward the long-term investor.

“Drivers of bubbles tend to be buying and selling by speculators," he says. "The increasing presence of farmers on the buyer side of agricultural land combined with a tight supply of land available for sale provides significant evidence there is not currently a speculator-fueled bubble.”

Liddell notes that another year of strong margins combined with the anticipation of continued tight supplies should drive land prices higher for at least one or two more years.

However, Liddell says after that it's more likely land values will drift down than continue going up.

He says the largest risk factors include:

  • the trend toward absentee farmers as land owned by aging farmers changes hands to non-farming heirs
  • interest rates
  • global commodity supply and demand
  • water availability
  • new environmental restrictions
  • reduced farm margins
  • biofuels policy
  • inflation