Agricultural Commodity Futures and Farmland Investment: A Regional Analysis

• Main Author: clements, john s, III
• Format: Others
• Published: ScholarWorks @ Georgia State University 2010
• Subjects: Farmland; Pricing Model; Futures Prices; Regression Analysis; Cointegration
• Online Access: http://scholarworks.gsu.edu/real_estate_diss/8; http://scholarworks.gsu.edu/cgi/viewcontent.cgi?article=1007&context=real_estate_diss

Using seventeen years of data from 1991 to 2008, I derive a pricing model for farmland values. This valuation model is the first using agricultural commodity futures as a proxy for “ex ante” income projections for the crops grown or livestock grazed on United States farmland. While not all inclusive, the model is tested regionally including the Corn Belt, Delta States, Lake States, Mountain, Pacific Northwest, Pacific West and Southeast Regions. Additionally, I test whether interest rate futures contracts have a relationship with farmland values as interest rates have been proven to be a reliable predictor in past research. Farmland capitalization rates and anticipated inflation have hypothesized relationships, but are mainly used as control variables in the study. In general, agricultural commodity futures contracts are a poor predictor of changes in farmland market values. When examining relationships with quarterly percentage change regression models of the included variables, I find the Mountain region provides the most reliable pricing model where both live cattle and Minnesota wheat futures contracts has a positive statistically significant relationships with farmland market values. Also, wheat futures prices have a significant relationship with farmland values in the Corn Belt region. Interest rate futures contracts, farmland capitalization rates and anticipated inflation are not statistically significant in the majority of the regions. As a robustness check, I model the price levels of the variables using Johansen’s cointegration procedure. This time-series econometric methodology provides results in regards to long-run equilibrium relationships between the variables. The results are only slightly better. Corn, orange juice and sugar futures contracts have positive statistically significant relationships with farmland market values in multiple regions. Again, wheat has a statistically significant positive relationship with farmland values in the Corn Belt region. The Mountain region and interest rate futures contracts are not applicable for the cointegration tests as they are not integrated to the order of one.