Interest Rates the Fertilizer for Farmland Prices?

February 14, 2013 | Nat Kellogg, CFA, President

This week’s chart of the week looks at the growth in mid-west farmland prices. Our chart shows the increase in farmland prices in Illinois, Indiana, Iowa and the Federal Reserve 7th District, which includes all three of these states. While this may surprise many investors, mid-west farmland has been one of the best performing investments over the last decade, up 12.3% annually. Higher crop prices and a shrinking supply of available high quality farmland drove this increase in farmland prices. Since both of these trends seem likely to persist into the future, institutional investors have begun to invest in farmland to take advantage of these trends. However, as our chart shows, the other driver of higher prices has been the persistent fall in interest rates which lowers the carrying costs (i.e. interest payments) of owning farmland for both farmers and investors. Given the recent rise in interest rates over the last few months it seems reasonable to question if farmland prices can continue their upward trajectory without the benefit of further reductions in interest rates.