Why Haven’t Agricultural Land Prices Also Crashed?
Question: I have a question about agricultural land prices. I have seen my home, apartment building, and stock values drop. In addition, there are rumors in the press about potential drops in commercial office and retail space. But agricultural lands are still at 2007 prices — small parcels (100 acres) sometimes selling for 60 times rents. Why do agricultural land prices seem largely unaffected by the drop in value in so many other areas?
Paul Solman: Great question and I have just the man to answer it: agricultural economist Gerald Nelson, a professor for years at the University of Illinois, developer of the Discover Econ software for McGraw-Hill textbooks, and now Senior Research Fellow at the International Food Policy Research Institute (IFPRI).
JERRY NELSON: A quick answer would be that a primary determinant of any asset value is the expected stream of future earnings. Urban real estate is driven by expectations about future rents. Agricultural land is driven by future agricultural prices. And while we are off the highs of 2008, agricultural prices are still high and the expectation is that they will continue to be high.