June 4, 2004
FARMLAND PRICES, NET RENTS AND INTEREST RATES SINCE 1970
Farmland prices in central Illinois have increased
about 6% per year since the late 1980s. In this article, we examine
whether increases in net returns or decreases in interest rates
since the late 1980s provide the economic basis for increasing farmland
prices. This analysis may shed light on the future direction of
This examination is accomplished by first calculating capitalized
values for central Illinois farmland based on yearly net rents and
interest rates. These capitalized values are then compared to actual
farmland prices to see how closely prices follow values. Capitalized
values equal to actual prices indicate that farmland is fairly valued
based on current levels of net rents and interest rates. Farmland
is overvalued when actual prices are above capitalized values. Conversely,
farmland is undervalued when actual prices are below capitalized
The following sections report on farmland prices, net returns,
and interest rates used to calculate capitalized prices. Capitalized
prices and a summary are then given.
Central Illinois Farmland Prices
Farmland prices are estimated based on index numbers produced by
the U.S. Department of Agriculture. This index is for the entire
state of Illinois and was used to estimate central Illinois prices.
As shown in Figure 1, farmland prices between 1970 through 1980
generally trended upwards, reaching a peak of $3,932 per acre in
1980 (see Figure 1). From this high, prices declined substantially
reaching a low of $1,706 in 1987. From 1987 onward, farmland prices
increased an average of 5.8 percent per year. In 2003, farmland
prices averaged $4,203 per acre in central Illinois.
Net Rents for Central Illinois
Net rents to central Illinois farmland were estimated from Illinois
Farm Business Farm Management (FBFM) Association record data. This
measure represents a return to farmland for share-rent landowners.
It does not reflect returns to cash rent farmland. All land ownership
costs including property taxes were subtracted from gross returns
to arrive at net rents. Because all ownership costs are subtracted,
net rents are below gross cash rents.
Between 1970 through 2003, net rents averaged $94 per acre. Since
1975, net rents have been variable but have not shown significant
trends up or down (see Figure 1). The 2003 rent of $116 per acre
was the third highest during the period, only being surpassed by
the net rent in 1993 ($123 per acre) and in 1996 ($126 per acre).
Given current commodity prices, the net rent in 2004 is likely to
be substantially above average.
Net rent as a percent of farmland price have
decreased since the late 1980s because of increasing farmland prices.
This percent represents a cash return to farmland and is conceptually
similar to dividends rate of returns on stocks. Between 1990 and
1994, the percent averaged 4.7% (see Table 1). During the second
half of the 1990s, the percent averaged 3.1%. Since 2000, the percent
Generally, interest rate reductions cause farmland ownership costs
to decrease. Therefore, interest rate decreases may cause increases
in farmland prices and, conversely, interest rate increases may
cause reductions in farmland prices. Changes in interest rates are
examined using rates on 10-year constant-maturity U.S. treasury
notes (see Figure 2).
From 1971 through 1981, interest rates exhibited
an increasing trend, reaching a high of 13.9% in 1981. Interest
rates were high throughout the early 1980s, the period in which
farmland prices fell dramatically. Since the mid 1980s, interest
rates have trended downward, reaching a rate of 4.0% in 2003.
To examine the joint impacts of net rents and
interest rates, capitalized values were computed for each year from
1970 through 2003. A capitalized value equals the net rent divided
by the interest rate. They represent the value of farmland given
that the future net rents and interest rates remain at their current
Capitalized values averaged $807 for the years between 1980 through
1984 (see Table 2). Since that time, capitalized values have increased.
Between 2000 and 2003, capitalized values averaged $2,113. This
suggests that farmland prices should have increased since the 1980s
if prices follow capitalized values.
Prices, however, have increased at a faster rate
than capitalized values. Between 1990 through 1994, the actual price
was $735 higher than the capitalized value. The difference has increased
to $1,844 for the 2000 through 2003 time period. The average for
the 2000 through 2003, however, is not as large as that for the
1980 through 1984 time period when farmland prices declined. During
this period, actual prices averaged $2,457 above the capitalized
In this article, movements in central Illinois farmland prices
are examined for the period from 1970 through 2003. Farmland prices
have increased since the late 1980s. Capitalized values suggest
that stable net rents and decreasing interest rates should have
caused farmland prices to increase since the late 1980s. However,
farmland prices have increased faster than rates suggested by capitalized
values. From a historical perspective, farmland prices in 2000 through
2003 may be overvalued compared to the period in the late 1980s
and early 1990s. Differences between and actual prices and capitalized
values have not reached levels seen during the early 1980s when
farmland prices declined dramatically.
Whether farmland prices will continue to increase in the future
is open to question. A continuing strong farmland market is suggested
by increases in cash rents, development of farmland into commercial
property, existence of favorable tax treatments for real estate
exchanges, current high prices for agricultural commodities, and
financial strength of farmers. Currently, however, net rents are
close to historically high levels and interest rates are at historically
low levels. It is highly likely that sometime in the future net
rents to farmland will decrease and interest rates will increase.
When this occurs, factors that have led to increasing cash rents
could be mitigated.
The author acknowledges that data used in this
study comes from the local Farm Business Farm Management (FBFM)
Associations across the State of Illinois. Without their cooperation,
information as comprehensive and accurate as this would not be available
for educational purposes. FBFM, which consists of 6,000 plus farmers
and 62 professional field staff, is a not-for-profit organization
available to all farm operators in Illinois. FBFM field staff provides
on-farm counsel with computerized recordkeeping, farm financial
management, business entity planning and income tax management.
For more information, please contact the State FBFM Office located
at the University of Illinois Department of Agricultural and Consumer
Economics at 217-333-5511 or visit the FBFM website at www.fbfm.org.
Issued by: Gary Schnitkey, Department of Agricultural
and Consumer Economics