Reality speaks - 2/26/2024 14:18

A small dose of reality to help brighten the mood. Did a quick analysis of the land values in N. Illinois relative to the profitability of 2023 results and it's not pretty.

During the time period of 2014-2019 N. Illinois cash return per acre (EBITA) assuming 2/3 corn 1/3 SB rotation based upon FBFM data was $340/ac I have a database from a farm realtor that covers this territory as well and based upon the average selling price the cap rate during that time period as 3.59% and that was 1.28% over the average 10-year T-bill. Land values actually declined during this time period by 15% but it was a very gradual decline (due to lowering of interest costs)

2020-2022 same folks showed a cash return per acre of $644/ac and the cap rate worked out to be 5.77% and that was 3.96% over the 10-year T-bill and land values increased 51% over this same time period.


2023 the preliminary information for these same folks is cash returns will be $333/ac and the land values continued to increase in 2023 (up 17-20%) and the resulting cap rate is 2.26% and that is 1.89% under the average 10-year T-bill.

We did not see a negative margin in the cap rate to the 10-year T-bill in the correction after the 2008-2012 bull run. It fell to a margin of .80% but it was still positive.

Also remember land values are a lagging indicator. 2013 values continued to increase over 2012 even though the returns had started to go down.
In 2020 land values actually decreased from 2019 even though returns were higher.
The higher land values in 2023 are a direct result of what happened in 2022.
Lower cash returns in 2024 = ?

The laws of financial physics for land values have not been repealed. Lower cash return and higher costs of capital = lower land values.

2023 land value average in the above-mentioned database for N. Illinois was $15,116/ac

Land values if market adjusts $350/ac return and a 4% 10 yr tbill and a 1 % margin over = 5% cap rate.
$350/ac/5% = $7000/ac

Assume a cap rate of 3.59% (same as in 2014-2019) gets you a land value of $9700/ac.

Something has to give what will it be?