U.S. farmland prices could be facing a downward correction after speculative investment, low interest rates, high crop prices have sent land values sharply higher in recent years, analyst says

LOS ANGELES , December 7, 2011 () – Farmland prices in the U.S. could be facing a downward correction after speculative investment, low interest rates and high crop prices have sent land values increasing sharply in recent years, a Macquarie Agricultural Funds executive said Dec. 7, Dow Jones Newswires reported the same day.

There is the possibility that a bubble is currently building up and could be cause for caution as returns are being squeezed, Macquarie agricultural product specialist Daniel Hough said.

U.S. farmland prices should not be three-to-four times higher than Brazilian land where the same crops are planted, or 30 times Russian prices, Hough said. High-yielding farmland is currently price around US$12,000-$15,000 a hectare in the U.S., versus $3,500 a hectare in Brazil and $500 a hectare in Russia.

Farmland prices across Indiana, Illinois, Iowa, Michigan and Wisconsin saw 17% average growth in the year to June 30, the biggest increase since 1977, Hough said, citing data from the Federal Reserve Bank of Chicago.

Farmland prices in the U.S. Midwest are up 40%-70% from 2005-2010, according to the U.S. Department of Agriculture.

Speculators are investing in land with thee expectation of future capital growth but the production returns on the land have fallen and are now between 1%-2% annually, Hough said.

Investors are looking toward South America and Eastern Europe where capital cost per unit of crop production are lower and sales are competitive, as U.S. farmland prices have been driven up in part from lower-interest rates that have made debt cheaply available.

The primary source of this article is Dow Jones Newswires, New York, New York, on Dec. 7, 2011.

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