The Impacts of Interest Rate Changes on US Midwest Farmland Values

Albulena Basha, Wendong Zhang, Chad E. Hart
January 2021  [21-WP 614]

Purpose: Our 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.
Methodology: We apply three autoregressive distributed lag 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. Our models capture both short-term and long-term impacts of policy changes on land values.
Findings: We 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. Our 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 and Policy Implications: Our paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. We demonstrate the long-lasting repercussions of Federal Reserve’s policy choices in the farmland market.

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