Source:  UNIVERSITY OF ILLINOIS, 5/30/14
 
Report Issued by Bruce Sherrick
Marjorie and Jerry Fruin Professor of Farmland Economics
TIAA-CREF Center for Farmland Research
Department of Agricultural and Consumer Economics
University of Illinois

Gary D. Schnitkey
Professor of Farm Management
Department of Agricultural and Consumer Economics
University of Illinois

There has been a recent increase in the number of inquiries received asking about the current farmland market, and potential parallels to the early 1980s; and about precursor indicators of the farmland value declines in what is often termed the farmland crisis of the 1980s.  This line of questions is not new as there have been suggestions about the potential for a farmland bubble from notable commentators and in sponsored events for several years now.[1]   In particular, technical comparisons and apparent pattern similarities have been highlighted and used as warnings for the potential for a farmland bubble, while the market for farmland has remained strong.

The purpose of this post is to simply provide summary empirical data on several selected factors that likely relate to farmland market conditions, and to also provide some brief discussion about a few other similarities and differences between the 1980s and the present.  Unlike traditional research studies, the intent is not to test a proposition or hypothesis, nor form a structural model to explain current or past prices.  Instead, it is simply to provide a "story in pictures" about farmland markets to help the reader reach their own conclusion about whether the farmland market "makes sense".  

Among the most important differences between the period leading up to the farm crisis of the 1980s and today are the radically different interest rate and lending environments.   Figure 1 shows the average new farm mortgage interest rate from the quarterly AgLetter Survey conducted by Federal Reserve of Chicago, along with the 10-year constant Maturity Treasury interest rate.  In the 1980s, farm mortgage rates peaked at nearly 17.5% and have generally declined through time in concert with mid-term treasury rates to their present levels.  The "spread over treasuries" provides one indicator of the perceived risk cost and spread over funding costs.  In the data shown, the farm mortgage spreads averaged just over 2.25% for most of the period after the crisis of the 1980s, which is a higher level than during the pre-crisis era.

To read the full report, click here.