A five-year bull market in U.S. farmland values may peak this year as interest rates increase and crop prices decline, Rabobank International said.Back on June 15 Rabobank made a timely call, "Rabobank Warns of Potential "Sharp Collapse" in Agricultural Commodity Prices (CORN; WEAT; DBA; DBC; MOO)"
Land costs may fall by as much as 15 percent in the next seven years, Sterling Liddell and Vernon Crowder, vice presidents at the bank, said in an interview. Gains in the past five years ranging from as much as from 70 percent in Nebraska to 20 percent in California were spurred by record grain and livestock prices and the lowest borrowing costs ever, Rabobank said in a report released today.
“Margins are once again expected to diminish as increases in the volume of commodity production combine with higher input costs to squeeze profit margins,” the analysts said in the report. “The result should be a slowing in U.S. agricultural land value growth, accompanied by occasional sharp decreases.”
Wheat and corn prices have more than doubled since the start of 2005 in the U.S. as farmers worldwide failed to keep up with demand. The boom will generate record income of $94.7 billion this year for American farmers, the government estimates. At the same time, the U.S. Federal Reserve’s benchmark lending rate has been zero percent to 0.25 percent since December 2008 as the central bank sought to shore up an economic recovery.
“Rabobank is forecasting a modest increase in U.S. interest rates in 2012,” Liddell said in an interview on July 1. “If interest rates return to the historical average of the 1990s in the next three to five years, that would have a negative impact on farmland.”
Farmland values in parts of 12 central U.S. states were as much as 23 percent higher than a year earlier by the end of March, according to data from the Federal Reserve in Chicago and Kansas City. That may not be the peak, Rabobank said.
“We are in a period of continued price volatility, and we may see additional price spikes,” Liddell, a vice president for food and agribusiness research at Rabo AgriFinance in St. Louis, said in the interview. This year, farmers were hit with flooding in some areas and drought in others, and until the crop is harvested, there may be swings in agricultural prices, he said.
The cost of agricultural land is justified by the income generated, and the investment isn’t a bubble, Liddell said. The ratio of debt to equity in farm property has been declining since the mid-1980s, the researchers said. Debt as a percentage of the value of assets averaged about 7 percent in the past five years, compared with 10 percent in the 1990s and more than 13 percent in the 1980s....MORE
The next day:
"GRAINS-U.S. corn, wheat slide deeper on crop weather (DBA; MOO; WEAT)"
Two weeks later the headlines were:
"Corn plunges on “shocking” USDA report"