Fads Versus Fundamentals In Farmland Prices

Abstract

A consensus appears to be forming that farmland price movements are not well-explained by the present value model with rational expectations. See, for example, Burt (1986), Featherstone and Baker (1987), Falk (1991, and Hanson and Meyers (1995). Although the specific methods and data sets differ across these papers, each one formally or informally rejects the present value model as an explanation of farmland prices. The reasons for the empirical failure of the present value model are not clear. Burt (1986) concludes that deviations of farmland price from its fundamental path can be explained in terms of overreaction to rent movements. Featherstone and Baker (1987), on the other hand, conclude that these deviations are largely determined by purely speculative forces, i.e., by fads. No one, however, has attempted to quantify the fad component to help resolve this basic issue. The approach is applied to annual Iowa farmland prices over the 1922-1994 sample period. Disciplines

Capitalization of Government Support in Agricultural Land Prices: What Do We Know?

“…If the PVM is correct, then land rents and land prices should have the same time series properties, and the spread, defined as the stationary linear relationship between land rents and prices, should add useful information in forecasting future changes in rents given past changes in rents. A number of studies tested for two main reasons of rejection of the PVM: time‐varying discount rates (Falk, 1992; Hanson and Myers, 1995) and the presence of speculative bubbles (Featherstone and Baker, 1988; Tegene and Kuchler, 1993; Falk and Lee, 1998). Following this literature, co‐integration testing has become a routine in many studies, as a preliminary step before the empirical application of the PVM.…”

Bankers’ Forecasts of Farmland Values: A Qualitative and Quantitative Evaluation

“…Between 2003 and 2013, farmland values in many parts of the United States exhibited unprecedented appreciation rates. The sudden increase in appreciation rates was troubling to many market participants given prior evidence that farmland prices have a tendency to overreact to shortrun changes in market fundamentals (Falk and Lee, 1998). Many researchers questioned the degree to which farmland prices were in a "bubble" (Olsen and Stokes, 2015;Stokes and Cox, 2014).…”

Accuracy of Qualitative Forecasts of Farmland Values from the Federal Reserve's Land Value Survey

“…Numerous subsequent researchers have proposed models to explain land price movements based on the present value of future returns (such as Burt, 1986, andFalk, 1991) and additional factors like capital gain movements (Melicahr, 1979) and inflation (Just and Miranowski, 1993). Falk and Lee (1998) show that land price movements are not forecast well using the present value model. Furthermore, Goodwin and Mishra (2003) note the empirical failure of forecasts based on econometric models is attributable to structural shifts, changing market forces, and an uncertain policy environment.…”