Asset prices are high almost across the board right now.
And it isn't just financial instruments that have seen their valuations soar. The value of farmland in the United States is exhibiting a similar trend.
Farm values have climbed steadily since 1993. The trend stalled temporarily in the wake of the financial crisis, but soon recommenced its ascent.
Two underlying forces are fueling the upward trend in farm values.
First, low interest rates reduce borrowing costs, which makes farms more profitable, thereby raising their value. Second, low energy prices reduce a farm's operating costs, which has the same effect on a farm's profitability and value as low interest rates do.
You can get a sense for what will happen to farm values when either of these trends reverses by looking back to the 1970s. Twin oil crises stemming from OPEC oil embargoes caused oil prices and inflation to rapidly rise, the latter of which pushed the Federal Reserve to raise interest rates. The net result was a sharp correction in farm values beginning in 1981.
It seems to follow that two things to watch right now are energy prices and inflation. As in the 1970s, they could hold the key to farmland's future fortunes.
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