Tuesday, August 30, 2011
Via Kay McDonald I was led to some data for the per-acre price of Iowa farmland, as well as annual rental rates for the same. I made the graph above for the price-to-rent ratio.
Clearly the food price boom of recent years has led to a considerable increase in land rents, but an even larger increase in land prices - hence the increase in the ratios above. The question is - is this now getting bubbly? The ratio for the pastureland in particular looks extraordinarily high - 1.7% is the implied annual return on investment, which compares very unfavorably to 10 year Treasury yields - seemingly a far less volatile investment. Even the cropland is only comparable to the 10 year treasury yield.
Either farmers and investors are correctly betting that food prices, and thus farm incomes, will be a lot higher in the future - not a crazy theory - or these acres are overpriced. In particular I wonder what supports the much higher price/rent ratio for the pastureland - is there some sense that it might be converted to more valuable cropland in future?