Rising interest rates and falling commodity prices are increasing the potential for the future development of an asset bubble in U.S farm land values, according to a new report from the Rabobank Food & Agribusiness Research and Advisory (FAR) group.
The report, “Land Values 2014: At the Tipping Point,” finds that up to this point, land values have responded to fundamental drivers. However, these fundamental drivers are changing quickly.
“Land values have followed fundamental economic drivers up, but there exists the possibility that land values many not follow these fundamental drivers down,” says report author and Rabobank Food & Agribusiness Research and Advisory (FAR) group Vice President, Sterling Liddell.
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Agricultural land in the U.S. has experienced a 12-year run in steep annual value increases. Over that time, the major fundamental drivers were high agri-commodity prices, low interest rates, and limited sales relative to demand. Now, key indicators are signalling that the long-term growth pattern needs to change or risk the development of an asset bubble by extending the value/cost of land beyond its economic capacity to generate returns.
“It is our view that land values in the U.S. do not currently represent an asset bubble and are responding to fundamental drivers. However, commodity prices are dropping, interest rates are creeping up and are poised to go higher, and demand has softened noticeably,” says Liddell. “An adjustment is needed beginning in 2014/2015 to avoid the future development of an asset bubble.”
“Changes in fundamental land value drivers are signalling the need for careful management of land value as both an asset and a cost, “says Liddell.
The full report is available to media upon request. Please contact Sarah Kolell, with Rabo AgriFinance.