Ana Claudia Sant’Anna and Ani Katchova, santana.3@osu.edu;
katchova.1@osu.edu
Over 80% of farm assets pertains to land, an agricultural input, an investment and even a collateral in loans. The Federal Reserve Bank of Chicago reports that agricultural land values for the Seventh Federal Reserve District (including Illinois, Indiana, Michigan, Wisconsin, and Iowa) showed signs of stabilizing in the first quarter of 2018, as farmland values were unchanged from a year ago. High quality farmland increased 1% in the first quarter of 2018 from the previous quarter in the District. Going forward into 2018, land values in Ohio are expected to continue to decline or remain stable. A major factor contributing to stagnant land values is lower farm incomes and grain prices, lower demand to purchase land, and tightened credit conditions. In turn, interest rates, although rising, remain low helping to boost land values.
Although cash rents in Ohio increased 1.3% from 2016 to 2017, declining farm incomes in Ohio may put downward pressure on cash rents. In 2018, reports from the Chicago Fed, show a decrease in cash rental rates for farmland in the District, though smaller than the 5% annual decrease in 2017. With farmers willing to bid up cash rents but with declining farm incomes, the expectation for Ohio is that cash rents will remain stable in 2018.
Interest rates in 2017 were the lowest since the 1960s. Lower interest rates imply lower opportunity costs, making investors willing to pay a higher amount for land for each dollar in current earnings from the land (Johnson 2016). An analysis of the land values to cash rent ratios (LV/CR), or that of land price relative to its earnings (Cai, Cosgrove and Paul 2018), show an average of 20 from 1960s to 1990s, increasing to the range of 35 to 40 from 2005 onwards (Figure 1).
Sources: Land values are from the USDA National Agricultural Statistics Service and the 10-year constant-maturity treasury yields are from the Federal Reserve Bank of St. Louis.
An increase in interest rates as planned by the Federal Reserve’s Federal Open Market Committee (FOMC) could mean downward pressure on farmland values (Sherrick 2018).
Land value volatility, a measurement of periodic standard deviations of changes in prices, provides information on land values movements. Figure 2 shows the conditional and unconditional land value volatility for Ohio. Conditional volatility takes into account past events while unconditional volatility is an average of past variance. Ohio land value volatility exhibits clustering over time. High land value volatility is followed by high land value volatility (1974-1980). Low land value volatility is followed by low land value volatility (1997-2000). For the next years Ohio land value volatility is estimated to be in the range of 5% to 7%. Spikes in land value volatility, as those witnessed in the 1980s, are not expected.
References
Cai, X., A. Cosgrove, and J. Paul. 2018. “Assessing the Investment Prospect of Farmland: Evidence from California.” Journal of the ASFRMA: 210–220.
Johnson, B. 2016. “An Analysis of Historical Illinois Farmland Valuations.” Southern Illinois University Carbondale. Available at: http://opensiuc.lib.siu.edu/cgi/viewcontent.cgi?article=2014&context=gs_rp [Accessed February 14, 2018].
Sherrick, B. 2018. “Understanding Farmland Values in a Changing Interest Rate Environment.” Choices (Quarter 1). Available at: http://www.choicesmagazine.org/choices-magazine/theme-articles/will-risi... [Accessed June 7, 2018].
Oppedahl, D., 2018. “Ag Letter: May 2018”. AgLetter, No. 1980. Federal Reserve Bank of Chicago.
USDA National Agricultural Statistics Service. 2017. “Land values 2017 Summary.” USDA–NASS, Washington, DC.