At the same time, it can be argued that high land prices are driven by underlying fundamentals. In the Farm and Dairy article, “Farmland value and rent outlook 2013,” author Barry Ward writes, “with strong balance sheets in spite of the drought, many farmers will continue to be in the land buying mode. The Income Method of Capitalization, an appraiser’s method of valuing assets, yields high land valuations based on 2013 projections for returns to land and interest rates….

“For example, using a $287.50 per acre ‘return to land’ (the midpoint of the projected soybean ‘return to land’ for 2013) and a 4-percent capitalization rate, farmland would be appraised (valued) at $7,187.50 per acre.”

Others are not so sure. In a New York Times article, “Across Corn Belt, Farmland prices keep soaring,” authors Ron Nixon and John Eligon write “two Fed surveys and sales data have raised concerns from bank regulators about a potential farmland bubble, similar to the housing frenzy that helped set off the financial crisis. A year ago, rising farmland prices prompted regulators to warn banks not to relax lending standards. In July, the Kansas City Fed held a symposium to discuss concerns about a bubble.

“‘Any time you have an asset that doubles in value over a decade, there is cause for concern about how sustainable that growth is,’ said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.”

Whether current land prices are sustainable or a bubble largely depends on whether recent factors that have positively affected land price increases continue into the future. Interest rates are unlikely to go into the stratosphere in the near future, and there will always be farmers looking add acreage to their farms.

The critical question marks are future crop prices and the ability of revenue insurance to help offset lower grain prices. What if the US produces 3.5-billion to 4-billion additional bushels of corn in each of the next couple years? This could easily happen if corn yields return to trend levels and farmers plant the corn acreage they brought into production the last couple of years.

That would not be a problem if there is a corresponding jump in demand. But demand prospects look much different from what was experienced in the previous five years or so. Clearly corn demand for ethanol will not repeat the explosive growth of earlier years. High feed prices and widespread drought have destroyed a significant portion of prospective livestock feed demand and US exports are likely to be affected as much by our export competitors supplying additional grain as importers demanding more grain.

Revenue insurance provides farmers nearly a “home free” card when crop revenue drops during—or just following—times when grain prices are abnormally high, but provide little to no meaningful protection during extended periods of severely depressed prices.

Two or three years of 14-billion- to 15-billion- bushel corn crops would most likely cause prices to be severely depressed. Since it is unlikely that revenue insurance could be the savior it has been this year and given the political climate for the next farm bill, it is very possible that net income in the years ahead will not support current land prices, let alone further increases in land prices. Then again with continuing weather-based yield shortfalls and the resulting high crop prices…

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu  and hdschaffer@utk.edu;  http://www.agpolicy.org