Bankers’ Forecasts of Farmland Values: A Qualitative and Quantitative Evaluation

Abstract

Abstract. This study evaluates the farmland price forecasts provided by the Federal Reserve Bank of Chicago's Land Values and Credit Conditions Survey from 1991: quarter 1 (Q1) through 2016: Q1. Prior studies have demonstrated that similar surveys of agricultural bankers provide accurate predictions of the direction of future farm real estate values through qualitative forecast evaluation. This study extends the existing knowledge base by converting the qualitative responses to quantitative expectations. The quantified expectations are then subjected to additional forecast optimality tests, which suggest that the forecasts are unbiased but inefficient.

Testing for regime-switching behaviour in Finnish agricultural land prices

“…Zakrzewicz et al (2013) discovered that expert reviews may improve the accuracy of price forecasts. Kuethe and Hubbs (2017), however, found that the experts' forecasts which they analysed were unbiased but inefficient, so that the aggregate forecast error was correlated with past aggregate forecast errors. This shows that expert knowledge does not outperform other methods, but statistical models are also needed.…”

Loss Aversion in Farmland Price Expectations

“…Thus, the study suggests that farmland purchasers do not make efficient use of all available information when forming expectations of future returns. Kuethe and Hubbs (2017) conduct a more direct test of rational expectations by examining quarterly farmland price expectations of agricultural bankers collected through the Federal Reserve Bank of Chicago's Land Values and Credit Conditions Survey between 1991Q1 -2016Q1. Using survey quantification methods on aggregated survey responses, the authors also reject rational expectations.…”

“…Most recently, Kuethe and Oppedahl (2020) extend the work of Kuethe and Hubbs (2017) by examining an unbalanced panel of individual responses to the Federal Reserve Bank of Chicago's Land Values and Credit Conditions Survey between 1993Q1-2019Q2. Kuethe and Oppedahl (2020) similarly reject rational expectations.…”

“…First, we leverage the unique characteristics of the Purdue Land Values and Cash Rent Survey to address the shortcomings of prior studies. The only two existing studies that directly test the rationality of farmland price expectations are limited to the qualitative expectations of agricultural bankers (Kuethe and Hubbs, 2017;Kuethe and Oppedahl, 2020). These studies therefore rely on survey quantification methods, the limitations of which that are well documented in the existing literature (see Nardo, 2003), and address the expectations of a narrow set of farmland market participants.…”

“…Specifically, traditional rationality tests require stringent assumptions of the costs associated with prediction inaccuracies, called the loss function. Previous studies reject the rationality of farmland price expectations under the mean squared error (MSE) loss function (Tegene and Kuchler, 1991b;Kuethe and Hubbs, 2017;Kuethe and Oppedahl, 2020). A prediction that minimizes MSE loss generates few prediction errors with large deviations from zero.…”