Source: FARM DOC DAILY, UNIV. OF ILLINOIS, 4/11/18

The Federal Reserve has initiated what appears to be sustained, incremental increases in the Federal Funds rate and by extension other interest rates. Current expectation is for a ¾ to 1 percentage point increase in 2018, after a ½ percentage point increase in 2017. Impact of increasing interest rates on cropland prices has become a topic of interest. Recent discussions include a USDA (U.S. Department of Agriculture) report (Burns and colleagues) and a 5-article issue of Choices, an outreach publication of the Agricultural and Applied Economics Association. This article continues the discussion. Using the simple asset capitalization formula, it finds that, since 2003, the increase in land rent is twice as important as the decline in interest rates in explaining higher cropland values. While increasing interest rates clearly create downward pressure on cropland prices if all other factors remain constant, the latter is rare. Other factors, especially rent, can either reinforce or offset the bearish tilt of higher interest rates. Interest rate is an important but far from an all-determining explanation of cropland prices.

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