WASHINGTON — The most recent data on farmland values suggest a stable market. This is despite a substantial drop in farm incomes. The large increases in land values of a few years ago were primarily driven by two factors, increasing farm income and falling capitalization rates. Today, income has fallen substantially. Still, farmland values have remained relatively high as cash rents have been stubborn to adjust lower. Additionally, the capitalization rate on farmland remains very low.
When looking at the data it appears that both of the key drivers that impact farmland values are stuck in neutral to reverse. Until farm revenues begin to grow or other costs decline, it is difficult to see how cash rents will increase. Likewise, with interest rates starting to rise, it seems unlikely that capitalization rates will fall much further. Given these two factors, it will be difficult for farmland values to resume much of an upward climb and they will likely experience some downward pressure. In short, it seems difficult to make a strong case for higher farmland values at this point.
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