If 3 years ago I told the average price of corn paid to farmers will average 3.5 over the next 3 years how much would you have expected the price of corn to drop? 


  I assume you mean how much would land values drop with a drop in corn price.

  I would have said not very much, but some from the high, primarily because of the relative strong balance sheets of farmers in aggregate, and large cash balances accumulated over the years, but as I have said, if those balance sheets continue to erode then farmland values will continue to soften.
  
   

  Am I calling for a collapse?, no but I like the following author points out, at this time, it is not the "80"s.
 







 However, Iowa farmland values do not appear to be in a speculative bubble that caused the dramatic declines in the 1980s farmland values or the urban real estate market in the mid-2000s. A comparison between this third golden era and the previous two reveal that farmers accumulated much more income, especially cash, during the most recent decade than what they did in the 1910s and 1970s before the farm crisis: inflation- adjusted net farm income increased by more than eight percent every year from 2003 to 2013, while the same measure dropped by three percent annually 1973-1981 due to high inflation. In addition, the agricultural sector was much more leveraged and vulnerable in the 1970s and 1980s compared to now: farmers used to be able to borrow up to 85 percent of inflated, market-based land value in the 1970s, while now they can only get less than half of cash- flow based land values. Finally, the safety net now is much stronger: in the 1980s, the total acres insured in the Federal Crop Insurance program was only 50 million acres for the entire U.S., and now just corn and soybean acres insured in Iowa almost exceed 25 million acres, representing 93 percent of all production acres."

"The demand for U.S. crop and livestock products is still very strong. The downward pressures on farmland values likely will continue to play out next year and beyond, but it will more than likely be a rational and modest correction as opposed to a sudden change. It is not possible to say where the farmland values will stabilize; however, the odds of commodity prices collapsing, a sudden stoppage of the Chinese economy, interest rates rapidly increasing, and/or land values collapsing are not high. The odds are not zero, but it doesn’t appear these events will occur in the foreseeable future.

A more likely scenario is that farmland values will return to more normal changes experienced over the past century. Since 1942 nominal and inflation-adjusted Iowa farmland values have averaged a 6.7 percent and 2.7 percent increase per year, respectively. Farmland values have increased 73 percent of the years, decreased 26 percent of the years, and remained unchanged for three years between 1910 and 2016. Farmland has historically been a fairly robust investment that generates relatively stable returns, and the Iowa farmland market seems to continue drifting sideways to slightly lower.

There are several unique uncertainties worth watching over the next year or two: first, it remains unclear how quickly and by how much the Federal Reserve Bank of Chicago will raise interest rates; second, it is uncertain how the new Secretary of Agriculture and trade agreement negotiations will affect agricultural exports and farm income; and third, the agricultural sector is closely watching possible policy changes, especially the 2018 Farm Bill discussions, stepped-up basis, and estate tax, as well as conservation.

There have been three ‘golden’ eras for Iowa land values over the past 100 years. The first one ended in a long, drawn-out decline in land values from 1921 to 1933, the second golden era ended with a sudden collapse from 1981 to 1986. The third golden era appears to be ending with an orderly adjustment as opposed to a sudden collapse. As opposed to the dramatic collapse of the agricultural sector in the mid-1980s, we might see this farm downturn resemble the trajectory of the 1920s farm crisis in the sense that there might be a long, drawn-out decline in the farmland market.

For more details and the author’s interpretation of the survey results, visit the ISU CARD Land Values website.

Wendong Zhang, extension economist, 515-294-2536, [email protected]