Farmland Values Face “Near-Term Correction”
January 17, 2016
Written By Adam Buckallew
Farmland prices in the United States are headed for “the first significant correction since the mid-1980s,” according to a recent report from MetLife Agricultural Finance.
The private agricultural lender, one of North America’s largest, expects land values to drop by an average of 20 percent by 2018 from recent peaks due to declining farmer profitability. The latest quarterly Ag Credit Survey conducted by the Federal Reserve Bank of Kansas City stated “low commodity prices continued to weigh on farm sector profits in the third quarter” and “profit margins remain weak throughout the agricultural sector.”
MetLife expects farmland values in the Midwest and Upper Plains regions to decline 22 and 26 percent, respectively, from peak to trough. This will be primarily due to corn and soybean prices bottoming out in the 2016-17 marketing year. Corn and oilseeds make up half of farm cash receipts in these regions, and MetLife anticipates the low price environment for agricultural commodities will persist through 2017. The report forecasts a milder drop in farmland values in the Southeast because the region has already experienced a correction that began during the Great Recession.
While the correction in farmland values may remind some of the crisis farmers faced in the 1980s, MetLife indicates the current situation is less dire because farmers are not as highly leveraged, interest rates are lower and the agricultural sector benefits from mandated corn demand for biofuels. On average, agricultural producers’ debt-to-asset ratios have ranged between 11 and 13 percent in recent years, well below the 1985 peak of 22 percent.
“The crisis in the 1980s was a product of policies that incentivized the sector to take on excessive leverage and an abrupt change in monetary policy that caused interest rates to rise,” MetLife said. “This is not the case today.”