Farmland Bubbles
Home foreclosures are high, and the outlook is bleak for the rest of the year. But there's one part of the real estate business that's booming. From Businessweek:
Farmland prices were 30 percent higher in Nebraska in the second quarter than a year ago, according to a survey by the Kansas City Federal Reserve Bank, driven by elevated crop prices, soaring farm income, and record-low interest rates. That’s the high end of increases in cropland valuations of 8 percent and more in the region stretching from Oklahoma to North Dakota and from Nebraska to Michigan. Last March these increases prompted Yale University economist Robert J. Shiller to call farmland his “dark-horse bubble candidate for the next decade.”
So now farmland is on the verge of a dangerous bubble, along the lines of the home real estate market of the past decade:
At the peak of the housing bubble, real estate prices were rising 17 percent year over year, according to the S&P/Case-Shiller index of property values in 20 cities. Seasoned bankers see a disturbing similarity with the farm boom, as former Kansas City Fed Chief Executive Officer Thomas M. Hoenig told the Senate Agriculture Committee in testimony earlier this year. Hoenig’s big worry, he said, is that imbalances in asset prices “will catch agriculture—and the U.S. economy more generally—by surprise once again.”
All of this just seems inevitable, doesn't it? Bubbles and busts; booms and collapses. Is there ever a moment when economists and central bankers aren't feeding a boom or adjusting against a bust? Farm land is going to fluctuate in value, naturally, with weather and demand and all sorts of unknowable external events. There's no way to mitigate that. Especially not with intervention from central bankers or Senate committee actions. That's how we got into this mess in the first place.
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Jun '10
Re: Farmland Bubbles
One of the unmentionables in this discussion is farm subsidies. By ensuring higher farm incomes at the expense of farm efficiency, the feds have been inflating farmland values for decades. The economic principle is a simple one: an efficient farmer can pay X for land; subsidize that farmer and increase his income by 20%, and he can then pay 1.2X for the same land.
Edited on Oct 20, 2011 at 9:49amMar '11
Re: Farmland Bubbles
In east-central Illinois, farmland has gone from $7,000 per acre in 2010 to over $12,000 today. Until the housing bubble burst, high prices were fueled by Section 1031 money, but that market has dried up. While subsidies are contributing to the current price rise, I don't think it's as much as Cas would indicate. The perception is that cash rents plus further increases in value create a rate of return higher than one could get with an interest bearing investment. Low interest rates both fuel the lending market for farmland and serve as the benchmark for determining an acceptable return. The bubble, if it exists, will burst as we see interest rates rise to combat inflation. I think that will happen, though I have friends who farm pretty large tracts who think I'm being too conservative. However, I don't see them going out and buying more land, most of the buyers are non-farmer investors like teachers' unions.
Edited on Oct 20, 2011 at 10:19amDec '10
Re: Farmland Bubbles
That's a great point. I'd still put my money on Sallie Mae pulling a Freddie Mac first. With farmland, even after the bubble bursts the land is still worth a large portion of it's original value, and foreclosure/bankruptcy lets farmers out from that obligation. When the Higher Ed. bubble bursts, unfinished educations are worth zilch, completed educations are devalued by flood of new grads, and neither can ever escape the enormous debt load.
Re: Farmland Bubbles
Could this be an ethanol subsidy bubble?
Mar '11
Re: Farmland Bubbles
My farmer friends think it is. For the most part they would rather see government money go toward expanding markets for U.S. grain rather than paying farmers a few bucks an acre to grow or not grow something.
Dec '10
Re: Farmland Bubbles
While I am sure most of this is foolish money chasing some kind of return, there are definitely people buying land to raise their own crops and place themselves at arm's length from a system that seems destined to collapse.
We do this on a small scale and engage in constant barter with folks around the country, through internet swaps. Often, no money changes hands, so it's only shipping costs. The way it works is somebody places an item (or several) up for a swap. That item occupies the swap thread until somebody comes along and wants it, then they place up an item. The whole process grinds to a halt if somebody puts up something undesireable, until somebody breaks down and accepts it.
You'd be surprised how much FedEx/Priority Mail/UPS traffic there is, out in the hinterlands, and amazed at the stuff we get (and get rid of), solely for the cost of shipping (shipper pays).
Edited on Oct 20, 2011 at 2:38pmNov '10
Re: Farmland Bubbles
Ethanol has a lot to do with it, but farmland is similar to gold but it pays dividends in the form of rent. Agricultural commodity prices are rising rapidly. My take is that this is a function of at least several other of things: 1) The dollar is getting cheaper and cheaper in real world terms while corn, soy beans, wheat and cotton are not; 2) There is a rational expectation for a lot of inflation down the road; 3) The developing world is beginning to be able to afford meat; and, 4) Technology has made a huge difference in crop yields over the past 10 or 20 years. Of course low interest rates and high subsidies help a lot too. I was just starting work in the late 1970s and early 1980s when we had a farm bubble. Then we had high inflation and a booming export market. Paul Volker killed inflation and Jimmy Carter killed exports. The bust was big. The article is correct that we may get a bust, but the balloon may just deflate some.
Jun '10
Re: Farmland Bubbles
Illiniguy: In east-central Illinois, farmland has gone from $7,000 per acre in 2010 to over $12,000 today. Until the housing bubble burst, high prices were fueled by Section 1031 money, but that market has dried up. While subsidies are contributing to the current price rise, I don't think it's as much as Cas would indicate. The perception is that cash rents plus further increases in value create a rate of return higher than one could get with an interest bearing investment. Low interest rates both fuel the lending market for farmland and serve as the benchmark for determining an acceptable return. The bubble, if it exists, will burst as we see interest rates rise to combat inflation. I think that will happen, though I have friends who farm pretty large tracts who think I'm being too conservative. However, I don't see them going out and buying more land, most of the buyers are non-farmer investors like teachers' unions. · Oct 20 at 10:18am
Edited on Oct 20 at 10:19 am
I agree with mostly everything you write, but I pulled 20% out the air, not intending it to be actual inflation.
Aug '10
Re: Farmland Bubbles
According to Austrian business cycle theory, any artificial or centralized setting of interests rates must cause a boom and bust cycle, because it distorts entrepreneurs' ability to predict future prices. Only the length and timing of the cycles are variable.
Jun '11
Re: Farmland Bubbles
I say there are two influences pushing this rise in farmland prices. The first is the Ethanol subsidy by the government and the pressure to bring more land under production for corn. The other is speculation by investors gambling the government will continue it's (Crony politics - Archer Daniels Midland) mandate of increasing Ethanol production and farmers desire to lease or buy more land to continue to reap the profits of growing corn. Of course like the frenzy of the housing market in the first half of the decade when speculators were telling everyone who would listen "the market was never going down" and people should buy a home because they would not be able to afford one in the future... The frenzy of this market for farmland has the same disastrous consequence looming in the future when people discover, like all people before them, what the government can give it can take away at everyone's detriment. Expect some form of farm bailout in the future for this foolish government intrusion.
Aug '10
Re: Farmland Bubbles
cant begin to tell how many acres flooded this summer, and it was the good stuff. eastern ill gives almsot 200 bushels, but at 12 k who cares ?
missouri bottom gave 150 but was alot cheaper, you should see how cheap it is now,covered with sand
sand blows away, takes longer than a bubble on the horizon
Re: Farmland Bubbles
This is a great discussion. But my question is: why do we talk so much about housing developments in Riverside County, or Florida, or in the southwest, and rarely, if ever, about farmland values in farming regions? It seems like we're missing a big story.
When did we decide that farming wasn't a major component of the national economy?
Mar '11
Re: Farmland Bubbles
To paraphrase Willie Sutton: "That's where the voters are." Seriously, when a shrinking number of producers can continue to supply the world with an abundance of food, the topic won't heat up until the day comes when people focus on how much edible commodity prices are and have been rising.
Here's something to consider. Until the housing bubble burst, farmers who owned land in the Chicago collar counties were selling farmland for development for fantastic sums, doing 1031 exchanges to buy cheaper land downstate. Since land values have plummeted (relatively speaking), they're leveraging their new land to buy back their old farms up north; often that land has utilites and improved roads right up to the property line. When the housing market turns around, they'll be able to sell "improved" property and the process will begin again.
Jun '11
Re: Farmland Bubbles
While I live in the South I'm also a "farmer" in Northwest Ohio. (The real farmer leases our land and works it along with his adjacent acreage.) I can report that the county tax collector is well aware of the rising value of great corn/ soy bean farmland. He notified me this summer that 2012 agricultural land taxes will roughly double. Funny how that works.
Corn prices rose several years ago with federal ethanol mandates but I would say that most of the recent increases are due mainly to the weaker dollar.
Mar '11
Re: Farmland Bubbles
I agree. By the way, how much does farmland in NW Ohio rent for per acre?
Jun '11
Re: Farmland Bubbles
Illiniguy
I agree. By the way, how much does farmland in NW Ohio rent for per acre? · Oct 21 at 7:38am
Oh, about enough to pay the taxes, insurance, and get a new pair of Oshkosh B'gosh every year. You know how it goes with family farming. Now if Ricochet had a way to contact one another privately we could discuss it a tad more precisely I reckon.
May '10
Re: Farmland Bubbles
I went home to visit my parents last weekend and we drove over to the farm to look around. We stopped at some rural cemeteries to look up some of my ancestors. (Old graves are spooky-cool; all those leaning obelisks! All those family stories: the pioneers, the booms and busts, the runaway son, the murdered wife. . .but I digress.)
Anyway, my parents mentioned that land prices are shooting up. (This is Hillsdale country: south-central Michigan.) I was caught completely by surprise. They were not thrilled. Sometimes too much "good" news can make a body nervous; that was definitely their feeling.
Edited on Oct 21, 2011 at 8:47amMar '11
Re: Farmland Bubbles
If you're a farmer, rising land prices aren't necessarily a good thing.
Jun '11
Re: Farmland Bubbles
Very true. Lots of guys are trying to get more land to farm as they already have the equipment costs etc. so rising land prices aren't great. Add that to my earlier point about agricultural land taxes going up and, while it's better than a price collapse it's not all good either.
(By the way, Illiniguy, $160/ acre would be the high side rent and I'm not getting that much. Low is around $95 this year best as I can tell.)