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n. Illinois | pick this up from an outfit called "Ag Economic Insights"
They have some very insightful commentary from time to time.
With the Collapse's of several large banks in the last two months all due to their mis matching assets and liabilites (IE they bet that interest rates would stay low forever)
We all need to be reminded that Ag Land values are not immune to this reality. IE cash returns go down and cost of money goes up = land values go down.
Anyone thinking that the cash returns we've seen the last three years are sustainable going forward are going to be sadly disappointed.
The Fed has made cost of money significantly higher.
The Financial institutions servicing the capital needs of Agriculture are not ready for this are you???
"There are two major drivers of farmland values – cash rental rates and capitalization rates. During the 1980s, Indiana cash rental rents fell from $106 per acre (1981) to $72 (1987), a 37% decline. Cap rates – or the relationship between the income generated by the asset and the asset’s value- increased from 5.0% (1981) to 8.1% (1986). With both trending unfavorably for farmland values, we can unpack the specific impacts using an accounting variance analysis (more details available here).
Figure 2 shows the cumulative sources of change in Indian farmland values from 1981 to 2001. To clarify, these data report the change from the 1981 peak in farmland values.
Overall, these data show how heavy-handed cap rates were during this period. At the extremes, cap rates weighed on farmland values by -$690 per acre in 1986.
At the worst, cash rental rates – which declined by more than one-third – erased $520 from farmland value by 1987. Of the nearly $1,200 per acre lost in farmland values from 1981 to 1987, 56% was attributable to the increase in cap rates. The remaining 44% of declines came from lower cash rents." | |
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