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April 27, 2020
There is a fifty-year trend of farmland capitalization rates (cap rates) coinciding with interest rates on Ten Year US Treasury Notes except for the high interest and inflation years of the 1980's. This makes sense on several levels including looking at farmland and Treasuries as "safe" investments. Right now, farmland cap rates of around 3% are higher than recent Ten Year Treasuries which are at historic lows.
Low interest rates motivate investors to search for assets that provide a better return and a safer investment during these uncertain times. Both situations have been helping support land values over the past several years. Returns on farmland are very favorable right now when compared to other investments which translates into demand to own farmland.
Will the current low interest rates continue to support farmland prices in light of the challenges in the farm economy with decreased demand and lower commodity prices? Will the depressing effects on farm incomes and the decreasing working capital of producers overcome the low interest environment to put pressure on farmland values? Farm finances will be helped by the additional infusion of federal cash payments to producers. The payments will help producers, but probably not make them whole from the potential losses in the markets.
There are many moving pieces in the world economy at this time and what is happening on US farms, agriculture, and in the food supply will continue to play out for months. Farmland owners, producers, sellers, buyers, and lenders will be closely watching the land market and land value trends.
Senior Vice President - Real Estate Operations
|Category: Agricultural Real Estate News|