Farmland Values and Interest Rates
Sam Kain, regional sales manager for Farm National Company in Des Moines, claimed that good farmland is still selling, but mediocre land is down 10%-15% over the past 12 months. In addition, Kain noted that recreational land has taken an even harder hit.
Another big change occurring in Iowa is the converting of pasture land into cropland. Farmers have seen how grain prices are rising, and some have even plowed up their pastures making way for grains.
The bottom in farmland values create a great opportunity to buy farmland. Although one of the primary risks when purchasing farmland today is the threat of increasing interest rates. As the Federal Reserve has set interest rates to nearly zero, they only have one direction to go, up.
Bob Wells, Farm & Business Management Specialist at Iowa State University farm, noted "One of the biggest fears we have is rapidly increasing interest rates, which would be detrimental to farmland values."
How do high interest rates hurt farmland?
High interest rates can indeed hurt farmland as an investment. Rising interest rates will increase borrowing costs and reduce profit margins. Also risk free alternatives, such as treasury bonds, will look pretty tempting.
Think of increasing interest rates as gravity pulling down asset’s values. As interest rates rise, in theory, the value of farmland should decrease. It’s all due to the time value of money. A dollar today is worth more than a dollar tomorrow. Future cash rents will not be as valuable today if interest rates began to rise. The cost to borrow money will also be higher.
How do you protect farmland from rising interest rates?
It is inevitable that interest rates will rise substantially at some point in the near-term. We expect the Federal Reserve to began raising rates in late 2010 to early 2011. In order to protect your farmland investment from rising interest rates, investors could use an interest-rate swap or short longer dated U.S. treasuries. Professional farmland managers will implement hedging strategies to protect investors assets from threats such as rising interest rates.
Long-term fundamentals for farmland are strong due to the world's growing population, rapid growth in emerging markets, and continued demand for ethanol and bio-fuels, although it is very important that farmland investors are prepared to protect their investment in farmland from the threat of rising interest rates.
- Colvin
Comments