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The impacts of interest rate changes on US Midwest farmland values

Albulena Basha ( Deutsche Gesellschaft Für Internationale Zusammenarbeit (GIZ) GmbH , Pristina, Kosovo)
Wendong Zhang (Economics and Center for Agricultural and Rural Development, College of Agriculture and Life Sciences, Iowa State University , Ames, Iowa, USA)
Chad Hart (Economics and Center for Agricultural and Rural Development, Iowa State University , Ames, Iowa, USA)

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 8 February 2021

Issue publication date: 29 September 2021

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Abstract

Purpose

This paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.

Design/methodology/approach

The authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.

Findings

The authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.

Originality/value

This paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.

Keywords

Acknowledgements

The authors thank Nathan Cook, Helen Jensen, Michael Duffy and Kelvin Leibold for comments on an earlier draft. Zhang and Hart gratefully acknowledge support from the USDA National Institute of Food and Agriculture Hatch Project 101,030 and 1020548; Basha acknowledges support from the Kosovo American Education Fund.Disclaimer: The views in this paper are the author's only and they do not represent the views of GIZ.

Citation

Basha, A., Zhang, W. and Hart, C. (2021), "The impacts of interest rate changes on US Midwest farmland values", Agricultural Finance Review, Vol. 81 No. 5, pp. 746-766. https://doi.org/10.1108/AFR-11-2020-0163

Publisher

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Emerald Publishing Limited

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