THE CAUSES AND CONSEQUENCES OF FARMLAND PRICE APPRECIATION

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 1002373
• Project Start Date: Jan 16, 2014
• Project End Date: Sep 30, 2018
• Program Code: [(N/A)]- (N/A)

Recipient Organization
UNIVERSITY OF ILLINOIS
2001 S. Lincoln Ave.
URBANA,IL 61801

Performing Department
Agricultural & Consumer Economics

Non Technical Summary
Farmland accounts for over 80% of the total value of all assets in the agricultural sector, valued over $2.4 trillion, and farmland also serves as the principal source of collateral in farm loans. As a result, changes in farmland values can greatly affect the financial health of farmers, farmland owners, and agricultural lenders. In recent years, farmland prices have exhibited historically high appreciation rates in many areas throughout the United States - including Illinois ­­- and farmland prices are now at record levels in both real and nominal terms. The price surge is driven by a number of factors, including high commodity prices and farm incomes, low interest rates, the demand for agricultural products in rapidly developing countries such as China, and the emerging biofuels industry. The high appreciation rates have occurred while many sectors of the economy have struggled to overcome the effects of the recent economic downturn, and as a result, many new investors have grown increasingly interested in acquiring farmland. This project will provided greatly needed information on the causes, consequences, and likely future of farmland prices.

Animal Health Component

50%

Research Effort Categories

Basic

50%

Applied

50%

Developmental

(N/A)

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
605	0120	3010	100%

Knowledge Area
605 - Natural Resource and Environmental Economics;

Subject Of Investigation
0120 - Land;

Field Of Science
3010 - Economics;

Keywords

farmland values

farmland price appreciation rates

Goals / Objectives
1. Examine the key drivers of farmland price changes, with focus on the recent record appreciation rates. 2. Explore the variation of farmland prices across locations, including agronomic, locational, and policy characteristics. 3. Evaluate the role of farmland as an investment, including farmlands risk and return relative to other assets and investment alternatives.

Project Methods
All objectives under the above themes are to be achieved using econometric analysis of existing datasets or econometric analysis of data to be gathered from surveys. Some of these research activities are currently underway and others are in the planning stages. In all cases, the research will be based at the University of Illinois, but may include data collection at other sites in the US and abroad.

Progress 01/16/14 to 09/30/18

Outputs
Target Audience:Over the reporting period, the target audience included professional farm managers, financial managers in the agricultural investment community, agricultural lenders, academic economists, and agricultural production students. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?Through academic papers, conference presentaitons, Extension presentations, and briefings for policy audiences. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Over the course of the project I have published a number of peer reviewed academic journal articles and presented research findings along the way to Extension audiences of professional farm managers, real estate appraisers, farmland owners, and farm operators. At the outset of the project, farmland prices across the Corn Belt increased substantially following high commodity prices. However, over the course of the project, farm incomes declined, yet farmland prices plateaued. Throughout the course of the project, the supported research program examined the changes in the relative contribution of various farmland characteristics to observed farmland prices. Regression analysis of observed farmland prices demonstrated that farmland prices are determined by a complex set of agricultural and nonagricultural factors. During the commodity price boom, the relative productivity of agricultural land was a significant driver of farmland price appreciation, and the relative contribution of developmentpotential declined as farmland conversion slowed following the 2008 financial crisis. Yet, nonagricultural factors remained an important determinant of farmland market values in many areas of the country, particularly in areas with high natural amenities or adjacent to urban areas.

Publications

Progress 10/01/16 to 09/30/17

Outputs
Target Audience:Over the reporting period, the targe audience included professional farm managers, financial managers in the agricultural investment community, agricultural lenders, academic economists, and agricultural production students. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?Presented work at a number of Extension and outreach events, including University Extension events, farm economy outlook meetings, and agricultural banker professional meetings. What do you plan to do during the next reporting period to accomplish the goals?Publish ongoing research in academic journals andpresent work in progress at multiple outreach and Extension events.

Impacts
What was accomplished under these goals? Published two journal articles. The first examines bankers' forecasts of farmland prices.It is difficult to forecast farmland prices empirically. Many institutions, such as the Federal Reserve and the USDA, rely on market opinion surveys to track current and future farmland price trends. The results show that bankers can accurately forecast short-term farmland price changes in most periods, but they tend to over predict price declines in recent years. The second paper examines the changing role of urban influence on farmland price determination. Between 2000 and 2010, farmland prices across the Midwest accelerated at record rates. This period represents both the agricultural commodity price boom and the global financial crisis. This study shows how farmland market price determination responded to these broad changes. Over this period, the price premium for development potential declined but the price premium for agricultural productivity increased.

Publications

• Type: Journal Articles Status: Accepted Year Published: 2018 Citation: Todd H. Kuethe and Todd Hubbs. 2018. Bankers Forecasts of Farmland Values: A Qualitative and Quantitative Evaluation. Journal of Agricultural and Applied Economics (Forthcoming).
• Type: Journal Articles Status: Accepted Year Published: 2018 Citation: Hanson, Erik, Bruce Sherrick and Todd H. Kuethe. 2018. The Changing Role of Urban Influence and Agricultural Productivity in Farmland Price Determination. Land Economics (Forthcoming).

Progress 10/01/15 to 09/30/16

Outputs
Target Audience:Over the reporting period, the targe audience included professional farm managers, financial managers in the agricultural investment community, agricultural lenders, academic economists, and agricultural production students. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?The results have been published in academic journals and through University Exension outlets, including Farmdoc Daily. The PI also presented work through Extension and outreach meetings and academic conferences. What do you plan to do during the next reporting period to accomplish the goals?I plan to continue ongoing research on farmland price appreciation. The results will disseminated through academic conferences and journal publications as well as through Extension publications and speaking engagements.

Impacts
What was accomplished under these goals? Under Goal One -Examine the key drivers of farmland price changes, with focus on the recent record appreciation rates: Farmland markets are notoriously thin, with approximately 0.5% of farmland changing hands in a typical year. As a result, industry experts and policy makers rely on appraisals and market opinions to gauge the trajectory of farmland price changes. We explored the impact of appraisal smoothing on the measurement of risk and return to farmland prices. The study finds that traditional measures of market risk are understated as a result of appraisal smoothing. We have publishedacademic study on the measureament of farmland prices.

Publications

• Type: Journal Articles Status: Published Year Published: 2016 Citation: Kuethe, T. 2016. The Risk and Return of Farm Real Estate and the "Bad Data" Problem. Agricultural Finance Review 76 (1): 140-150.

Progress 10/01/14 to 09/30/15

Outputs
Target Audience:Over the reporting period, the target audience included professional farm managers, financial managers in the agricultural investment community, agricultural lenders, academic economists, and agricultural production students. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?The project PIparticipated in several academic meetings including multi-state projects. How have the results been disseminated to communities of interest?Oral presentations and publications in the Univesity of Illinois' farmdocDaily Extension program. What do you plan to do during the next reporting period to accomplish the goals?During the next reporting period we will make adjustments to reflect suggestions made through the peer review process.

Impacts
What was accomplished under these goals? A number of submitted manuscripts and outreach presentations were created related to each goal. Research and revision is still being conducted.

Publications

• Type: Journal Articles Status: Published Year Published: 2015 Citation: Jennifer Ifft, Todd Kuethe and Mitch Morehart. 2015. Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS). Agricultural Finance Review, Vol. 75 Iss: 3, pp.349 - 367.
• Type: Journal Articles Status: Under Review Year Published: 2016 Citation: The Changing Role of Urban Influence and Agricultural Productivity in Farmland Price Determination.
• Type: Journal Articles Status: Under Review Year Published: 2016 Citation: The Risk and Return of Farm Real Estate and the Bad Data Problem.
• Type: Journal Articles Status: Under Review Year Published: 2016 Citation: Farm Returns and the Broader Economy.
• Type: Journal Articles Status: Under Review Year Published: 2016 Citation: Business and Credit Cycles in Agriculture.

Progress 01/16/14 to 09/30/14

Outputs
Target Audience: Over the reporting period, the targe audience included professional farm managers, financial managers in the agricultural investment community, agricultural lenders, academic economists, and agricultural production students. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest? The results have been published in academic journals and through University Exension outlets, including Farmdoc Daily. The PI also presented work through Extension and outreach meetings and academic conferences. What do you plan to do during the next reporting period to accomplish the goals? I plan to continue ongoing research on farmland price appreciation. The results will disseminated through academic conferences and journal publications as well as through Extension publications and speaking engagements.

Impacts
What was accomplished under these goals? 1. Examine the key drivers of farmland price changes, with focus on the recent record appreciation rates. Published several academic studies on key drivers of farmland prices, including linkages between farmland price and urban development, farmland prices and agricultural policy, and farmland and agricultural use. 2. Explore the variation of farmland prices across locations, including agronomic, locational, and policy characteristics. Published several academic studies on key drivers of farmland prices, including linkages between farmland price and urban development, farmland prices and agricultural policy, and farmland and agricultural use.

Publications

• Type: Journal Articles Status: Awaiting Publication Year Published: 2015 Citation: Ifft, J., Kuethe, T.H. and Morehart, M. The Impact of Decoupled Payments on U.S. Cropland Values. Agricultural Economics.
• Type: Journal Articles Status: Published Year Published: 2014 Citation: Ifft, J., Wu, S. and Kuethe, T.H. The Impact of Pasture Insurance on Farmland Values. Agricultural and Resource Economics Review 43(3): 390-405.
• Type: Journal Articles Status: Published Year Published: 2014 Citation: Delbecq, B., Kuethe, T.H. and Borchers, A. Identifying the Extent of the Urban-Fringe and its Impact on Agricultural Land Values. Land Economics 90(4): 587-600.
• Type: Journal Articles Status: Published Year Published: 2014 Citation: Borchers, A., Ifft, J. and Kuethe, T.H. Linking the Price of Agricultural Land to Use Values and Amenities. American Journal of Agricultural Economics 96(5):1307-1320.