Brian Briggeman

Jason Henderson

English

Research Papers in Economics

                                Issue 2 www.KansasCityFed.org/Omaha 1
What are the Risks in Today’s Farmland Market?
by Jason Henderson, Vice President, Omaha Branch Executive and 
Brian Briggeman, Economist
F
armland is a bellwether to the 
financial health of the U.S. 
farm sector, accounting for 85 
percent of U.S. farm assets. Its value 
is typically based on the expected 
revenues from agricultural production. 
Sparked by surging grain prices, U.S. 
farmland values soared to record 
highs at the end of 2010. However, 
the double-digit gains in cropland 
values outpaced the rise in cash rents. 
Thus, many observers question the 
sustainability of such high land values 
and suggest that other factors, such as 
low interest rates, are driving current 
farmland values. 
Farmland values often rise with 
persistently low interest rates and 
strong crop prices. Low interest rates 
lift farmland values by reducing the 
discount on the future income stream 
produced by the land. In addition, 
low interest rates depress the value 
of the dollar, which in turn boosts 
agricultural exports, raises commodity 
prices and enhances farm revenues. 
Conversely, rising interest 
rates can reduce farmland values by 
widening the discount on the value of 
future income streams. In addition, 
research has shown that higher interest 
rates can depress commodity prices, 
farm revenues and farmland values. 
Higher interest rates in a strong 
economy increase the risks of falling 
farmland values—which in turn could 
cut farm assets, boost leverage ratios 
and impair farm balance sheets.
This article takes a closer look at 
risk in today’s farm real estate market. 
After describing current trends, the 
article analyzes whether the recent 
surge in farmland values to record 
levels is sustainable. The article finds 
that if interest rates rise to more- 
normal levels and crop prices swoon, 
land values could fall, suggesting 
that farmers could experience a 
deterioration in their balance sheets. 
Farmland Value Trends
After softening in the recent 
recession, surging farm revenues fueled 
a sharp rebound in U.S. farmland 
values. Since June 2010, U.S. corn 
and wheat prices have doubled due to 
strong export demand and tight crop 
inventories. In response, crop profits 
have soared to record highs, lifting 
Midwestern cropland values.
Federal Reserve Bank of Kansas City September 201 0
Economic information 
    for the Cornhusker State
THE
ECONOMIST:
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street
Agricultural and Rural Analysis
THE
ECONOMIST
…“if interest rates rise to more-
normal levels and crop prices swoon,  
land values could fall”…Prior to the recession, farmland 
values were rising at the fastest clip 
since the 1970s. After jumping 20 
percent in 2005, U.S. farmland values 
grew 7.5 percent annually from 2005 
to 2008 (Chart 1). The recession 
reversed this trend. Heading into 2009, 
residential demand for farmland fell, 
global food demand plunged and crop 
prices suffered. Although U.S. housing 
markets remained weak in early 2010, 
the global economic recovery led to 
a modest rebound in agricultural 
commodity prices and land values at 
the beginning of the year. 
In the second half of 2010, 
crop prices rose unexpectedly with 
burgeoning exports and tighter crop 
inventories. Stronger economic activity 
in emerging countries, especially 
China, led to stronger-than-expected 
export activity in 2010, with U.S. grain 
exports rising roughly 13 percent. At 
the same time, drought conditions in 
Russia and wet weather in the United 
States cut world grain inventories. 
Consequently, 2010 ended with the 
combination of strong demand and 
tight supplies  —U.S. grain prices 
doubled, and crop profits soared. 
In response to surging crop prices 
and profits, gains in Midwestern 
cropland values quickly accelerated. 
In the fourth quarter of 2010, 
Federal Reserve surveys reported 
that Midwestern cropland values 
jumped almost 20 percent above 
year-ago levels (Map 1). The strongest 
gains emerged in the western Corn 
Belt, where cropland values rose 18 
percent. Other surveys of farmland 
values reported similar increases, 
and expectations for further gains 
continued to build. 
With farmland values rising faster 
than cash rents or revenues from crop 
production, questions naturally arise 
about the sustainability of current 
land prices. According to the U.S. 
Department of Agriculture (USDA), 
U.S. cropland values have soared 
more than 40 percent since 2004, 
outstripping the 17 percent gains in 
cash rents. The Federal Reserve Bank 
of Kansas City reported near the end 
of 2010 that land values were rising 
at twice the rate of cash rents.1 This 
apparent decoupling of land values 
and cash rents suggests that other 
market factors, such as low interest 
rates, are driving farmland values.
Interest Rates, Farm Revenues 
and Capitalization Rates 
Concerns about the sustainability 
of farmland prices tend to surface in 
periods of low interest rates. Farmland 
values are based on the capitalized 
value of expected economic returns 
to farm production, which are shaped 
by demand and supply forces in the 
market. Low interest rates boost the 
capitalized value of farmland in two 
Main Street ECONOMIST THE
Federal Reserve Bank of Kansas City Issue 1, 2011
www.KansasCityFed.org/Omaha 2
Chart 1
Real U.S. Farm Real Estate Values
0 
500 
1000 
1500 
2000 
2500 
1940  1950  1960  1970  1980  1990  2000  2010 
Constant 2005 dollars per acre 
Source: USDAways. First, low interest rates push 
down the capitalization rate.2 
Second, farm revenues are often 
higher when interest rates are low. 
Low interest rates lead 
to higher farmland values 
by lowering the discount or 
capitalization rate. In general, 
people prefer to have a dollar 
today over the promise of 
earning a dollar tomorrow. 
When compared to the value of 
current income, future income 
streams are valued at a discount. 
The size of the discount depends 
on interest rates—the investor’s 
required rate of return. Low 
interest rates shrink the discount 
on the current value of future 
income streams. As a result, 
farmers and other nonfarm 
investors will bid against one 
another in agricultural real estate 
markets for ownership of these future 
revenue streams, thus capitalizing 
these future revenues into current 
farmland values. As interest rates fall, 
the investor’s required rate of return 
declines, pushing down the discount 
and capitalization rate, in turn lifting 
farmland values. 
Historically, low long-term 
interest rates have spurred rising 
farmland values by lowering the 
capitalization rate. Since the mid-
1990s, after adjusting for inflation, 
yields on the 10–year U.S. Treasury 
security, which is a risk-free rate, and 
the interest rate on farm real estate loans 
have both trended downward. In fact, 
since 2000, these interest rates have 
averaged their lowest level since the 
1970s. These lower long-term interest 
rates have coincided with a decline in 
the cash rent-to-land value ratio, a proxy 
for the capitalization rate (Chart 2). 
In addition, low interest rates 
lift farmland values by strengthening 
farm revenues. Low interest rates place 
downward pressure on the value of 
the dollar and make U.S. agricultural 
products more affordable to foreign 
consumers, thus boosting the demand 
for U.S. exports, raising agricultural 
commodity prices, and lifting farm 
revenues (Chambers and Just). More 
recently, research has shown that 
commodity price inflation responds 
much more quickly to shifts in 
monetary policy (Saghaian, et al.). 
When short-term interest rates fall, 
commodity prices rise, in turn boosting 
farm incomes. Since 1970, real net 
farm incomes were higher during 
times of low short-term interest rates, 
measured by the inflation-adjusted 
yield on the one-year Treasury security 
Map 1 
Non-irrigated Cropland Values 
(Percent change 2009:Q4 to 2010:Q4)
Kansas 
19.3% 
Nebraska  
17.6% 
Texas  4.9% 
Oklahoma  5.0% 
Wyoming 
Colorado 
Northern 
New Mexico 
4.0% 
Iowa  
18.0% 
Montana 13.6% 
Northern 
Indiana  
12.0% 
North Dakota  
23.7% 
South 
Dakota  9.8% 
Minnesota 
19.3% 
Southern 
Wisconsin 
7.0% 
Northern 
Wisconsin 
10.7% 
Northern
Illinois
11.0%
www.KansasCityFed.org/Omaha 3
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street ECONOMIST THE
Source:  Federal Reserve District Surveys 
(Chicago, Minneapolis, Kansas City, Dallas)www.KansasCityFed.org/Omaha 4
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street ECONOMIST THE
Chart 2
Real Interest Rates and Capitalization Rates
Sources: USDA , Federal Reserve, BLS
-4.0 
-2.0 
0.0 
2.0 
4.0 
6.0 
8.0 
10.0 
12.0 
-4.0 
-2.0 
0.0 
2.0 
4.0 
6.0 
8.0 
10.0 
12.0 
1970  1975  1980  1985  1990  1995  2000  2005  2010 
Nebraska Cash Rent-to-Land Value Ratio 
Yield on 10-year U.S. Treasury Security - adjusted for inflation 
Interest Rate on Nebraska Farm Mortgages - adjusted for inflation 
Percent  Percent 
Chart 3
Real Interest Rates and Net Farm Incomes
Sources: USDA , Federal Reserve, BLS
-5.0 
-2.5 
0.0 
2.5 
5.0 
7.5 
0.0 
25.0 
50.0 
75.0 
100.0 
125.0 
1970  1975  1980  1985  1990  1995  2000  2005  2010 
Real Net Farm Incomes Less Government 
Payments (Left Scale) 
Yield on 1 Year Treasury - adjusted for inflation 
(Right Scale) 
Constant 2005 dollars (billions)  Percent
(Chart 3). Conversely, real net farm 
incomes were lower with higher interest 
rates.3 The combination of stronger farm 
revenues and lower capitalization rates 
sparked the sharp farmland value gains 
at the end of 2010. 
Capitalizing Future Revenues
If historical relationships hold true, 
Midwestern cropland values hinge on 
farm revenues, interest rates and their 
relationship with the capitalization 
rate. Assuming average Midwestern 
crop yields, various combinations of 
corn prices and capitalization rates can 
rationalize current cropland values. 
However, all of these combinations 
assume historically high crop prices 
or historically low capitalization rates, 
which raise the risk in land markets. 
With economic models suggesting that 
today’s historically high farm revenues 
have been capitalized at historically low 
rates of return, agricultural real estate 
values could fall sharply if crop prices 
sag or future interest rates rise. 
To illustrate the risk facing 
farmland values, a straightforward 
net present value model is used to 
determine the capitalized value of 
future crop revenues (Lamb and 
Henderson). Assuming constant 
revenues in the future and a constant 
capitalization rate, cropland values can 
be determined by:
Cropland values = Future revenues ÷
Capitalization rate.  (1)
In this model, future revenues 
are limited to the returns that are reinvested into the land or the 
amount received by the landowner. 
While the returns to land vary with 
farm profitability, the portion of 
gross revenues allocated to land 
owners has remained fairly constant 
over time. Over the past three 
decades, USDA costs of production 
data indicate that land owners 
receive about 25 percent of all gross 
revenues generated from cropland.4 
Therefore, future revenues can be 
estimated as a quarter of expected 
farm revenues, based on expected 
crop prices and yields. As discussed 
earlier, capitalization rates can be 
proxied with historical cash rent-to-
land value ratios.
Using equation (1), current 
farmland values appear to reflect 
current market conditions. For 
example, the current average market 
price for irrigated cropland in eastern 
Nebraska is estimated to be roughly 
$5,300 per acre.5 Assuming an average 
corn yield of 200 bushels per acre, an 
average 2010 farm-level corn price 
of $5.35 per bushel and Nebraska’s 
average 2010 capitalization rate of 5.1 
percent, the capitalized cropland value 
is estimated at roughly $5,300 per acre 
($5.35 *200 *0.25 ÷ 0.051 = $5,245).6 
Analyses of farmland values in other 
regions of the nation produced similar 
results, also suggesting that current 
farmland values reflect high farm 
revenues and low capitalization rates.
Nevertheless, farmland values face 
significant risk. If returns on alternative 
investments rebound, capitalization 
rates could increase and cut farmland 
values. For example, with prices 
remaining constant and capitalization 
rates rising to their historical average of 
7.5 percent, eastern Nebraska’s irrigated 
cropland values could drop by almost a 
third (Chart 4). 
Farmland values could also fall 
if farm revenues decline. In response 
to today’s current high commodity 
prices, U.S. farmers are expected to 
expand their crop production.7 With 
larger production, crop inventories are 
projected to rise, placing downward 
pressure on crop prices. In fact, by 
2013, USDA projects U.S. corn prices 
to fall to $4.10 per bushel with larger 
inventories. If these expectations are 
realized and corn prices fall to $4 
per bushel, irrigated cropland values 
in eastern Nebraska could fall more 
than 20 percent, even if capitalization 
rates remain at today’s historically low 
levels (Chart 5). 
The worst-case scenario is a 
combination of higher capitalization 
rates and falling farm revenues. In 
1981, the spike in real interest rates 
pushed capitalization rates to historic 
highs. At the same time, high interest 
rates contributed to higher exchange 
www.KansasCityFed.org/Omaha 5
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street ECONOMIST THE
2000 
3000 
4000 
5000 
6000 
7000 
8000 
9000 
10000 
3.0%  3.5%  4.0%  4.5%  5.0%  5.5%  6.0%  6.5%  7.0%  7.5%  8.0% 
Farmland capitalization rate 
Dollars per acre 
Eastern Nebraska  
Irrigated Cropland Value = $5300 
Chart 4
Capitalized Revenues on Nebraska Irrigated 
Cropland at Various Capitalization Rates
Authors’ calculations assuming 200 bushels per acre, 
a corn price of $5.35 per bushel and 25% of gross revenues capitalized into land.Farmland values soared at the end 
of 2010. Strong demand and tight 
supplies fueled a spike in U.S. crop 
prices, while low 
interest rates 
contributed 
to both lower 
capitalization 
rates and higher 
commodity 
prices. Across much of the Midwest, 
rising farmland values have 
outstripped the increases in cash 
rents, raising questions about the 
sustainability of current values. 
In the long-term, future farm 
revenue expectations and interest 
rates should determine farmland 
values. Today, the interest rate risk 
to farmland values is high. Record 
high farmland values are based 
on expectations of interest rates 
remaining low for an extended period. 
As the economy 
strengthens, 
however, interest 
rates could rise, 
which may lift 
capitalization rates 
and lower farm 
revenues. Events such as these could 
become a recipe for falling land values 
and the erosion of farm wealth. 
rates, lower agricultural exports, falling 
commodity prices, and cuts in farm 
revenues. From 1981 to 1987, the 
combination of higher capitalization 
rates and falling revenues contributed 
to a 40 percent decline in real U.S. 
farmland values, with even larger 
declines in nominal farmland values. 
If similar events occur in today’s 
environment, farmland values could 
plummet. For example, in eastern 
Nebraska, if capitalization rates return 
to their historic average of 7.5 percent 
and corn prices fall to $4 per bushel, 
then irrigated cropland values could fall 
nearly 50 percent to about $2,600 per 
acre. Other regions face similar risks. 
www.KansasCityFed.org/Omaha 6
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street ECONOMIST THE
“In the long-term, future farm revenue 
expectations and interest rates should 
determine farmland values.”
Chart 5
Capitalized Revenues on Eastern Nebraska 
Irrigated Cropland at Various Corn Prices
1000 
2000 
3000 
4000 
5000 
6000 
7000 
8000 
2.5  3.0  3.5  4.0  4.5  5.0  5.5  6.0  6.5  7.0  7.5 
Corn price (dollars per bushel) 
Dollars per acre 
Eastern Nebraska  
Irrigated Cropland Value = $5300 
Authors’ calculations assuming 200 bushels per acre, a 5.1% capitalization rate and 25% 
of gross revenues capitalized into land.
Summarywww.KansasCityFed.org/Omaha 7
Federal Reserve Bank of Kansas City Issue 1, 2011
Main Street ECONOMIST THE
endnotes
1Brian Briggeman and Maria Akers. 2010. “Farmland Values 
Climb and Credit Conditions Improve” Survey of Tenth 
District Agricultural Credit Conditions, Federal Reserve 
Bank of Kansas City, Third Quarter, http://www.kansascityfed.
org/publicat/research/indicatorsdata/agcredit/AGCR3Q10.pdf
2For more information on capitalization rates and farmland 
values see Jason Henderson. 2009. “Will High Farmland 
Values Hold?” Main Street Economist. Federal Reserve Bank 
of Kansas City, Issue VI, http://www.kansascityfed.org/publicat/
mse/MSE_0609.pdf
3In a regression of current and lagged values, 1-year treasury yields 
adjusted for inflation were found to be negatively and significantly 
correlated with contemporaneous real net farm incomes.
4In the costs of production data, cash rent is the amount of 
revenues returned to the land owner.
5In February 2010, irrigated cropland values in eastern Nebraska 
were reported to be almost $4900 per acre. Assuming 10 percent 
gains in land values as reported by Federal Reserve Bank surveys, 
irrigated cropland values would be $5380 per acre. 
6Nebraska corn yields from irrigated production were obtained 
from the USDA. Farm level corn prices were the average 
2010 U.S. price obtained from USDA World Agricultural 
Supply and Demand Estimate (WASDE).
7Crop production and price information obtained from 
USDA’s Agricultural Projections to 2020 www.ers.usda.gov/
Briefing/Baseline/
RefeRences
Chambers, Robert G. and Richard E. Just. 1982 “An 
Investigation of the Effect of Monetary Factors on 
Agriculture.” Journal of Monetary Economics, Vol. 9, pp. 235-
247.
Henderson, Jason. 2008. “Will Farmland Values Keep Booming?” 
Economic Review, Second Quarter. pp. 81-104. www.kansascityfed.
org/PUBLICAT/ECONREV/PDF/2q08henderson.pdf.
Lamb, Russell and Jason Henderson. 2000. “FAIR Act 
Implications for Land Values in the Corn Belt.” Review of 
Agricultural Economics, Vol. 22, pp. 102-119.
Saghaian, Sayed, Michael R. Reed, and Mary A Marchant. 
2002. “Monetary Impacts and Overshooting of Agricultural 
Prices in an Open Economy.” American Journal of Agricultural 
Economics, Vol. 84, No. 1, pp. 90-103.

What are the risks in today’s farmland market?

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What are the risks in today’s farmland market?

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