"Recent increases in farmland prices raise questions about
whether the farmland price increases are outpacing increases in
farmland returns," explained Gary Schnitkey, U of I Extension
farm financial management specialist and author of the study
"Are Farmland Prices in Line with Farmland Returns?" The report
Schnitkey approached the problem by comparing
farmland prices to capitalized values. He noted that the USDA's
list of average prices for Illinois masks differences across the
state. For example, farmland prices are much higher near
Chicago. Because of those differences, price-to-return
relationships vary across the state.
"Farmland prices increased from $490 per acre in 1970 up to
$2,023 per acre in 1982," he said. "Then, prices decreased,
reaching a low of $1,149 per acre in 1987. Since 1987, farmland
prices have increased each year, with the average yearly
increase 7 percent."
"Since 2003, increases have been above 7 percent. Farmland
prices increased 7.4 percent between 2003 and 2004, 27.6 percent
between 2004 and 2005, 14.1 percent between 2005 and 2006, and
13.9 percent between 2006 and 2007. Between 2003 and 2007,
farmland prices increased by $1,900 per acre -- 78 percent."
Capitalized values, he explained, represent the earning
potential of farmland from agriculture. A capitalized value for
a given year equals cash rent divided by an interest rate and
assumes that investors receive the current cash rent each year
in the future and the interest rates do not change.
"Higher cash rents cause higher capitalized values,"
Schnitkey said. "Lower interest rates cause higher capitalized
In 2006 and 2007, farmland prices exceeded capitalized values
-- 46 percent higher.
"Prior to the current period, the last time farmland prices
exceeded capitalized values by a large margin was from 1977
through 1981," he said. "During the late 1970s, farmland prices
increased because of strong commodity prices. In the 1980s,
financial stress occurred, leading to declining farmland
Will the current period of farmland prices relative to
capitalized values mirror the 1977 through 1981 period? Will
farmland prices decline in the future?
[to top of second column]
"While farmland prices may decline, there are two differences
between the current period and 1977 through 1981," Schnitkey said.
"First, much of the decline in capitalized values between 1977
and 1981 was associated with higher interest rates. Interest rates
increased from 7.42 percent in 1977 to 13.92 percent in 1981. It is
doubtful that interest rates will show similar increases in future
Second, he added, cash rents are expected to increase over the
next several years because of robust agricultural returns. Rising
cash rents will increase capitalized values, causing the difference
between farmland prices and capitalized values to narrow.
"However, cash rents need to increase by large margins before
farmland prices are only 7 percent higher than capitalized values,
the relationship between 1986 through 2004," he said.
"In 2007, the Illinois farmland price is $4,330, the interest
rate is 5 percent, and the cash rent is $141 per acre. Given that
farmland prices and interest rates do not change, cash rents need to
increase by $62 per acre to $203 per acre before farmland prices are
only 7 percent higher than capitalized values."
Examining the long-term scenario, Schnitkey noted that some
questions exist whether farmland prices can maintain their current
levels relative to capitalized values.
"Either a new relationship between farmland prices and
capitalized values exists, where farmland prices exceed capitalized
values by a large margin, possibly caused by more urban demand for
farmland, or growth in farmland prices must slow so that capitalized
values catch up with farmland prices."
[Text from file received from
the University of