Is Farm Real Estate The Next Bubble?

The recent increase in farmland prices leads many to conjecture that a price bubble exists. A dataset of Iowa farmland prices for three grades of quality over the last 60 years is examined to address the question whether the conditions for a rational expectations bubble are evident. An abnormal component in the change in farmland prices is found during the most recent sub-period of the sample. A novel valuation model that measures the speculative component of farmland value as a function of cash rents shows no speculative component is present. An additional test of the time series characteristics of the data provides no evidence of negative duration dependence. However, analysis of transition probabilities shows asymmetry exists most notably in the low quality farmland data series. Finally, time irreversibility is shown to be present at different lags for only the lowest farmland quality grade. Overall, the results imply that the low quality grade farmland is the most likely candidate to exhibit the conditions necessary to support a rational expectations bubble. In general, however, the data offer weak support of a bubble in farmland prices.