Agricultural land prices, after several years of double-digit rates of appreciation, look to fall in the upcoming months because corn prices have been on the decline. Less ‘dividend’ from the land means lower price of that underlying asset.
The cash price of corn from Central Illinois has essentially been cut in half, from $8 per bushel to now $4. With the forecast of even more supply of bumper crops later in the year, the price of corn could fall even farther.
Agricultural land prices suffered greatly in the early 1980s when two bad things occurred simultaneously: the price of corn measurably fell and interest rates rose sharply. Many farmers heavily suffered as they could not generate enough revenue to pay off interest on borrowed money.
This time around, the lower corn prices will have a negative impact. But the borrowing level among farmers has been much more moderate. Moreover, interest rates still remain near historic lows. Therefore, any decline in land prices will be modest and not like the 1980s. Most farmers will be able to absorb some decline in land prices without facing financial problems.
Because corn is not only used for human consumption but also for live stock feed, some of the strong increases in meat prices that we have witnessed in the past year are likely coming to an end. Beef prices may not fall back down to levels of one year ago, but they will no longer further increase.
Unlike the days of open-range cooking by the cowboys, beef consumption growth in the U.S. has markedly slowed because of changing tastes and due to increased health-consciousness. But beef consumption is booming in Asia, particularly in China and Korea, in line with their income growth. Even in Japan, where beef and other blood-soaked products of work animals had once been considered as the food for poor people, taste buds have gravitated towards massaged cow from the Kobe region. It is the Asians that will keep the beef prices from falling. (Conversely, it is the Americans that will keep the sushi prices from falling.)
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.