Are Farmland Prices a Bubble?

Q: Are farmland prices a bubble?

A: I don’t know, but if they are, we didn’t do it Presentation prepared for GIC and Memphis Economics Club conference on “Food and Inflation: Truth and Consequences” Memphis, TN February 8, 2012

The views expressed here are not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System

The rise in farmland prices has been about 44% greater than the rise residential real estate prices during the housing boom 2.5

2

2000 = 1.0

Residential and Farm Real Estate Prices

Case-Shiller Composite 20 index, 2001-2006: 80% Aggregate Farmland price per acre, 20012011: 115%

1.5

1

0.5

0

Source: USDA National Agricultural Statistics Service, S&P, Fiserve, MacroMarkets LLC, author’s calculations

2

The Fed anticipates about three more years of “exceptionally low rates”

… the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Statement of the Federal Open Market Committee, January 25 2012 3

Over a ten year period, the FOMC’s extension of the “take-off” date would mean interest rates will be about 60 basis points lower on average Hypothetical Federal Funds Rate Paths

5

Average annualized percent

4.5

Rates begin to rise in August 2013

4 3.5

Rates begin to rise in October 2014

3 2.5 2 1.5 1

Calculations assume 25 basis point increases each FOMC meeting until the rate reaches 4.6 percent

0.5 0 2012

2013

Source: Author’s calculations

2014

2015

2016

2017

2018

2019

2020

2021 4

A simple asset-pricing framework Land Value =

Income discount rate – growth rate

Let’s suppose: --- The discount rate = 10-year Treasury rate --- 10-year Treasury rate = 10-year average federal funds rate Land values would be about 1/3 higher if interest rates are held near zero until late 2014 instead of mid-2013 5

Has easy policy created a bubble? Define easy A key concept: The “equilibrium real interest rate�

The interest rate (adjusted for inflation) that we will see (over time) when all is right with the world: --- GDP is near its potential --- Inflation is near its target 6

Has easy policy created a bubble? Define easy • If the federal funds rate is below the equilibrium rate, we might think of policy as easy • If the federal funds rate is above the equilibrium rate, we might think of policy as tight

• If the federal funds rate is equal the equilibrium rate, we might think of policy as neutral 7

Tighter 4 Policy

Easier Policy 3/1/2000 8/1/2000 1/1/2001 6/1/2001 11/1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/2003 12/1/2003 5/1/2004 10/1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/2006 11/1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/2008 12/1/2008 5/1/2009 10/1/2009 3/1/2010 8/1/2010 1/1/2011 6/1/2011 11/1/2011

The federal funds rate was set at more stimulative levels during the housing boom, but is about neutral now Percent, annual

The Interest Rate Gap

3

2

1

0

-1

-2

-3

Source: Federal Reserve Board, author’s calculations

8

The appreciation of farmland prices has proceeded independent of the stance of monetary policy

2.5

Residential and Farm Real Estate Prices

2000 = 1.0

2

1.5

1

0.5

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: USDA National Agricultural Statistics Service, S&P, Fiserve, MacroMarkets LLC, Federal Reserve Board, author’s calculations

2011 9

The appreciation of farmland prices has mirrored a downward trend in the level of real interest rates Farmland Prices and the Equilibrium Real Interest Rate 4

Index of Farm Real Estate Prices (2001=1)

3 2 1 0

Equilibrium Real Interest Rate (Annual Percent )

-1 -2 -3 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: USDA National Agricultural Statistics Service, S&P, Fiserve, MacroMarkets LLC, Federal Reserve Board, author’s calculations

2011

10

The global imbalance between desired investment and desired saving continues Current Account Surpluses Billions

1996 Industrial Countries US Euro Area Germany Developing Countries Developing Asia China

2003

2010

46.2

-342.3

-91

-120.7

-530.7

-470.9

88.5

24.9

-60.0

-13.4

55.1

185.0

-87.5

205.0

422.3

-40.8

148.3

313.2

7.2

45.9

305.4

Source: 2005 Bernanke remarks, International Monetary Fund

11

Q: Are farmland prices a bubble?

A: I don’t know, but if they are, we didn’t do it