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U of I economists weighing long-term farmland values
 

 

TIM ALEXANDER

Illinois Correspondent

EAST PEORIA, Ill. — The headwinds, tailwinds and long-term prospects for farmland markets were the topics of University of Illinois assistant professor Todd Kuethe’s presentation during the 2018 Illinois Farm Economics Summit on Dec. 19.

Kuethe detailed how farmland prices across much of the Corn Belt experienced a rapid appreciation from the early 2000s through about 2014, when the bottom dropped out on grain prices and farmland investors became nervous. Now, he said farmland values have appear to have plateaued, as market observers express a variety of opinions about the likely direction of farmland prices in the short and long terms.

Kuethe’s opinion is that farmland values will remain strong as tailwinds fan the current economic downturn many farmland owners and managers are facing head-on. He also agrees with market observers who point to long-term earning potential as a way to justify higher expected farmland prices.

“We saw increases in farmland prices and income that were during the ethanol demand around 2008 to the 2014 period,” he said. “When we had that large income, we saw farmland prices shoot up and as farm incomes have declined, we have seen farmland prices stabilize in the Corn Belt. One of the mysteries is why they have not come down.”

According to Kuethe, farmland prices may be supported by continued increases in global demand for calories and proteins provided by farmers. This reflects global changes in population and wealth, he said, with more pronounced shifts occurring in developing and transitional economies.

“The people who are optimistic about farmland right now are really betting heavily on growth. I am talking about income, I am talking about discount rates, talking about growth,” Kuethe said. “A lot of our costs of production are going up, interest rates are going up, farm borrowing is going up and our prices are going down.

“We have seen a real downturn in farm income. A lot of people have been concerned about how this will affect land values and how we will discount future incomes.”

These are what Kuethe referred to as headwinds restricting farmland value increases: declining farm incomes, increasing interest rates and mortgage interest rates and uncertainty over tariffs and trade and other factors.

He ended his 25-minute presentation at the Par-A-Dice Casino Hotel and Conference Center in East Peoria with an optimistic view on long term farmland values.

“Those who are most optimistic about farmland are looking at the very long-term perspective. They are also looking at it relative to all the other ways they can spend their money in terms of investments. So, in conclusion, there is sort of a mixed outlook about farmland values,” he said.

“Most of the things that are downward pressures are clustered on short-line expectations. Most of the places you find optimism for farmland growth are based on long-run expectations, but we are in a kind of a unique time when both expectations are grounded in uncertainty.”

According to the research presented by Kuethe and U of I colleague Bruce Sherrick during the Summit tour, farmland value optimists also stress that farmland prices may be insulated from drastic declines as a result of a relatively fixed supply, thin transaction markets and risk mitigation provided by the Federal Crop Insurance program.

All of these factors, Kuethe said, should help limit the potential for farmland prices to overreact to short-run disturbances in underlying price fundamentals.

He was in the midst of a five-day, five-city tour across Illinois as part of the U of I farmdoc team’s annual Summit. He admitted that after a few days stuck in a car with a team of U of I economists, his optimistic outlook for future farmland values had become a little bit soured.

“As the tour goes on, I am becoming more pessimistic. Riding around the state with a bunch of economists and hearing their gloomy presentations can do that,” he said, grinning.

Kuethe’s presentation slides can be accessed online at www.farmdoc.illinois.edu/presentations/IFES_2018

1/16/2019