To determine if commodity prices have a significant impact on land prices, Real Estate Center researchers tested the validity of several commonly held perceptions.
At the state level, all four commodities exhibited significant leading indicator characteristics with respect to rural land prices (Table 1). The results imply that a change in the price of oil leads a change in the price of land by three months (one quarter), while a price change in cotton leads by 15 months (five quarters). A change in the price of beef leads by nine months (three quarters), and corn leads by six months (two quarters). The analysis shows that Texas rural land prices have a time-delayed response spread over different time periods, and the effects of each commodity are different. They also demonstrated a positive relationship between them collectively, meaning an increase in commodity prices generally leads to an increase in rural land prices.
Overall, the four commodity prices demonstrated a statistically significant leading indicator relationship with land prices for the seven rural land regions (Table 1). The length of the lead varies between regions and commodities. In region one, all four commodities exhibited a significant lead compared with region seven, where only beef and corn price changes were found to be statistically significant (Table 1). A commodity leads a change in the price of rural land by a minimum of three months to a maximum of 33 months. While the four commodities exhibited different lead times when compared to one another, the three historical Texas commodities—oil, cotton, and beef—exhibited stronger statistical leading relationships than corn (Table 1). In regions where commodities were nonexistent or minimal, no significant leading indicator status was observed.
Short-Run, Long-Run Relationships
The consistent significant results obtained from the estimates show commodity prices, especially oil and cotton, do have a significant direct short-run impact on Texas rural land prices for the 30-year sample period (Table 2). Not surprisingly, region seven had no short-run relationship because virtually none of the four commodities were produced in that region (Table 2).
No short-run relationship was exhibited between corn and any of the rural regions compared with the three commodity pillars of the Texas economy—oil, cattle, and cotton (Table 2). Changes in cotton prices seemed to exhibit a short-run relationship in six of the seven regions followed by oil with five out of seven, and beef with one out of seven regions (Table 2).
The long-run estimates showed consistent significant results revealing a long-run relationship between oil and cotton in four out of seven rural land regions (Table 2), demonstrating the strong ties between these two commodities and rural land prices for the past 30 years. Unexpectedly, only a long-run relationship at the state level was found with corn prices (Table 2), meaning that by region there is no significant relationship, but an aggregate long-run relationship exists between rural land prices and corn prices.
Based on these findings, Center researchers proceeded to evaluate how an unpredictable change (shock) in the price of the four commodities affects rural land prices in the short- and long-run. The analysis was done only for the regions where a significant relationship was found. This analysis reveals the isolated way an unexpected movement (shock) in the real price of commodities affects real rural land prices over time. As the figures show, the response of land prices in the full sample to a positive change in the price of the commodities is statistically positive (Figures 9–33), meaning a positive unexpected change in the price of one of these commodities leads to a positive change in rural land prices. The inverse is true if commodity prices fall; that is, it would cause a negative change in rural land prices. The results mean that the effects of the commodity price changes are felt through time in the price of rural land.
For more information, see Center publication number 2151, "Oil, Cattle, Cotton: Commodities Affect Land Prices."
Dr. Torres (firstname.lastname@example.org) and Dr. Gilliland (email@example.com) are research economists with the Real Estate Center at Texas A&M University.