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Land, rates, and the Fed

Jeff Caldwell 05/22/2013 @ 8:47am Multimedia Editor for Agriculture.com and Successful Farming magazine.

It's been widely documented that interest rates and farmland values are fairly closely tied. And, right now, very low interest rates are enticing more buying than selling, adding a lot to land demand and pumping up prices.

But interest rates will turn higher eventually. When they do, a lot of land-value experts say farmland values will take a fall. Now, data gleaned from a look back at the last 60 years of interest rate cycles confirms not only the inverse link between interest rates and land values, but also refines the time frame for the cycle of rates and land values. Most importantly, both this cycle and some variables therein -- namely potential Federal Reserve monetary policy -- foreshadow when a rise in interest rates might occur, if it does at all.

Schnitkey uses September 2011 as the general date from which rates have remained at fairly consistently low levels. Since then, rates have fluctuated, but not enough to comprise a trend either direction. However, it is likely still part of a trend, he says.

"Currently, the 10-year rate is below 2%. Given these low rates, the period of generally decreasing rates since the early 1980s appears to have come to an end, as it is difficult to see how rates can decrease further," Schnitkey says. "Moving forward, rates likely will either 1) remain stable at the current low levels, or 2) begin an increasing period."

So, what has happened when interest rates have cycled higher after years at low levels? History is a good guide. Take 1953, for example. Schnitkey says in April of that year, the 10-year constant maturity rate was 2.8%. It stayed that way for about five years until June 1958.

"There was roughly a five- to six-year period of stable interest rates in the 1950s, suggesting that a current period of low rates could exist for a relatively long time," he says.

So, extrapolate that to today. The current period of rates in the basement began in September 2011. While that's not quite been five years ago, it's approaching the point at which things turned around in the 1950s. Now, look at what happens in the other half of the trend. A perfect example of that happened in the late 1970s and early 1980s.

"From August 1979 to September 1981, rates increased from 9% to 15.3%. During a one-year period from June 1980 to May 1981, rates increased by 4.3%. During this period, the Federal Reserve Bank tightened monetary policies in order to control inflation rates while also lowering unemployment rates," Schnitkey says. "Much of the current low current rate environment is attributable to loose Fed monetary policy following the financial crisis of 2008. As a result, attention is given to possible tightening monetary policies in the future. As of now, the Fed has not signaled a tightening monetary policy."

So, what's it all mean? That latter variable, Schnitkey says, is the 800-pound gorilla in the land values/interest rates equation. Fed policy and its resulting effects on rates will be what likely allow the cycle of interest rates to eventually turn higher, if history is any judge. Right now, that's not yet in the cards.

"Interest rates currently are at low levels, supporting higher farmland prices. While rates are low, there are historical examples of low rates persisting for a long time period. Hence, historical analysis does not suggest that low interest rates necessarily lead to rising interest rates in the near-term," Schnitkey says. "Some are concerned about rapidly rising interest rates and the attendant impacts on farmland and other asset pricing. As occurred in the 1980s, tightening monetary policy could lead to rising interest rates. At this point, dramatic changes in Fed policy do not appear to be occurring, suggesting that a rising rate environment will not occur due to Fed action."

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