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Which way for farmland prices?

Is the farmland bubble bursting?

In the short term, no. But, in the longer term, a few key factors may contribute to downward pressure on land values. But at the same time, there's equal reason to believe the sharply higher trend in land values may only sharpen further.

Looking ahead to 2013, the explosion in land values is expected to fizzle a bit, but still remain burning driven largely by what's expected to be a rise in interest rates and a softening of the commodity marketplace. But, that's not an altogether bad thing, according to the recent report from Rabobank.

"The slowdown is a result of the dramatic 2012 jump in values as well as looming macroeconomic worries," the report shows. "This slowdown will help keep values in line with underlying fundamentals and thus such a slowing would be beneficial for the long-term financial health of the U.S. crop production industry."

The value runup of the last 2 years has caused an over-valuation of the land market where prices are right now not sustainable in the longer term, the report shows. But, high prices have started to turn that tide.

"Recent surveys conducted in the Midwest confirm that current high prices are reducing the willingness of some buyers to continue bidding agricultural land values higher," the report shows. "Despite the expectation for some slowing, three factors underpin a stable growth outlook in 2012/13: Strong commodity prices, low interest rates and strong rental rates."

Commodity prices are arguably the largest driver of higher land prices; the Rabobank report shows even current harvest prices are sitting at above-breakeven levels. But, interest rates are expected to stay low through at least the first half of 2014, likely fueling rising values through that time.

"In addition to implications for cheap capital for making long-term land investments, low-yielding treasuries enhance the attractiveness of land compared to alternative investments," the report shows. "Agricultural land rental rates have surged over the past year, providing support for higher mortgage payments. While this has more long-term implications, in the short term, increased rental values reflect positive economic returns from land investments."

Though factors like these will keep things moving higher for the coming year and a half, they likely won't keep anxieties from growing, too. There's a ton of volatility in the marketplace right now already, and though there's reason to expect the value spike could continue at its current rate, at the same time, the wheels could still fall off the bus because of other wildcards.

"Global grain and oilseed stock conditions are currently tight enough to cause a significant price response to any reduction in production. Expectations of additional liquidity from higher prices in the farm sector would likely renew interest in farm investment and threaten to increase land values at a more rapid rate than currently expected," the report shows. "Alternatively, continued economic slowdown in the European Union, which impacts key commodity import economies such as China, could threaten global commodity markets and consequently slow U.S. land value growth."

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