Oklahoma and Texas have lower capitalization rates due to mineral rights inflating farmland values. Given low capitalization rates, farmland values face significant interest rate risk. For example, irrigated cropland in eastern Nebraska is valued at $ per acre. A historically low capitalization rate of 5 percent is needed to rationalize this land value at current corn prices and yields (Table 1).
If interest rates would rise and lift capitalization rates to their historical average of 7.5 percent, the capitalized value of irrigated farmland in eastern Nebraska could fall by a third to $ per acre (Chart 3). If capitalization rates would rise to 10 percent as they did during the 1980s farm crisis, land values could drop by half.