Are Illinois farmland prices too high?

Although home values have gone down, the value of Illinois farmland is up by 18 percent.

According to an Aug. 4 report released by the U.S. Department of Agriculture, the price of Illinois farmland averaged $5,800 per acre in 2011, an increase of 18 percent over the 2010 level of $4,900.  

“The 2011 increase continues a string of large increases that began in 2004,” said University of Illinois agricultural economist and farm management specialist Gary Schnitkey.

“Since 2004, Illinois farmland prices have increased by 222 percent. Or, another way of putting it, farmland is 2.2 times higher in 2011 than in 2004.

“The last seven-year period in which land prices increased an equivalent amount was from 1975 through 1981. During this period, Illinois farmland increased from $846 per acre in 1975 to $2,188 per acre in 1981, resulting in farmland prices being 2.6 times higher in 1981 than in 1977.”

Have prices gone too high?

Schnitkey evaluated this question using capitalized values calculated for each year from 1970 through 2011.

He explained that a capitalized value equals all future returns discounted to the present. Higher returns increase the capitalized value. Lower interest rates lead to higher capitalized value.

The equation: capitalized value equals average cash rent divided by an interest rate.

“If the farmland price is above the capitalized value, then farmland is over-priced relative to its discounted returns,” Schnitkey said. “Conversely, farmland is under-priced if farmland prices are below capitalized values.”

Source: http://southeastfarmpress.com