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Napanee, Ontario | Nah, sure you are! GT, it's saying that farmland returns track government bond returns.
The 10 yr treasury bond yield is the bedrock measure which all finance as we know it in the western world is built around. You may have heard of the 'risk free rate'. That is the 10 year T-bond yield.
The 10 year interest rate has been dropping steadily from its peak in the early 80's. What that means is that 10 year bonds have been getting more and more expensive. Their prices have been rising as more investors are willing to accept lower returns, yoy, and continue to bid them higher.
For example, A move from 5% interest rates to 2.5% rates means that the bonds have doubled in price. A 5% return means a 20 year payback period. A 2.5% return means a 40 year payback. As you can see from the chart, rates are at all-time record lows, which means that bond prices are at all-time record highs.
You can also see how the blue line has more or less followed the trend of the green line for much of this period. The blue line is the average rent yield on an acre of Ill. farm ground. According to the chart, it is at 3% (say 300 rent / 10,000 acre land). The spread between these two lines is roughly the same as it's been the last 20 years before.
The period of major divergence occurred in the 80's, where people bid up the land to a return that was far lower than what could be fetched in a 10 year gov't bond. So, no surprise the land crashed and the lines regressed to their normal spreads. Which is what we still have today - a normal spread between the two.
Land has only done what gov't bonds, stocks, gold, other assets have done - been bid to record highs. Stocks have doubled in 5 years, bonds have, gold nearly has..... so why should land still stay the same price? Everything is built around the risk free rate. If it is substantially reduced, then the return that investors demand in other alternative assets will also be reduced as people bid them up on the spread arbitrage.
Lol sorry, that was probably a lot longer explanation than you were looking for... clear as mud i hope. Basically, the short answer is on the first line. Any questions feel free to shoot!
Edited by OldMcdonald 6/24/2014 15:31
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Some actual good news
