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By Randy Dickhut, Sr VP/Real Estate Operations

It has often been cited that low-interest rates support real asset values and this makes sense for various reasons. It has also been observed that the ROI (Return on Investment) for farmland defined as rent divided by value has generally tracked the Ten-Year Treasury Rate except for the past few years when interest rates hit new lows and farmland ROI plateaued around 3%.

The following two graphs from the University of Illinois Department of Agriculture and Consumer Economics demonstrate the effect low-interest rates, among other factors, have had on land values.

The first graph demonstrates that farmland rents and land values pretty well track each other, but have changed the relationship in the recent low-interest rate and higher rent years. During the high-interest rate years of the 1980s and up until the runup in land values topping in 2012-13, current year rents supported the underlying land values with the higher interest rates and ROI. With the advent of lower interest rates in recent years, the capitalized farmland value and actual land prices started to outstrip the underlying rental income.

In the second graph, we see that farmland prices and the calculated capitalized value tracked each other closely until about 2007-10 when farm incomes and therefore rents started to rise due to higher commodity prices. Capitalized land values started to increase more rapidly than actual land prices as interest rates started to decline. The peak of the capitalized value in 2020 happened because of the historically low Ten-Year Treasury Rate of around 1%.

It will be interesting to watch how rising interest rates in the U.S. along with what is expected to be elevated commodity prices for several years will affect the ROI for farmland and land values. Land values also have other factors influencing sales prices including supply for sale, demand by farmers and investors, and overall economic conditions.

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