The Next Real Estate Bubble: Farmland

HenrievilleUT farmlandWhat’s a poor farmer supposed to do when his or her land is caught up in an investment bubble? Via The American:

Farmers have been taking on mounting debt, creating an unsustainable increase in land prices and risking a crash that would ripple through our economy.

Eeyore should have been a farmer. It’s almost impossible to find a farmer happy about his situation. The weather’s too hot, cold, wet, or dry, and prices are too low or too high, depending on whether we’re buying or selling. We can’t, at least in front of our peers, admit to prosperity or even the chance of prosperity. Although we’d never admit it at the local coffee shop, the last few years have been good, at least for Midwestern grain farmers. Prices have been strong — strong enough to make up for much of the production lost to last year’s drought. That’s terrible news for livestock producers, who’ve been faced with drought-damaged pastures and high feed costs, but for farmers producing corn and soybeans, it has been a profitable few years.

Farmers have cash, and nowhere to invest it but farmland. Farmers largely ignore equities, as they tend to balance the inherent risk in farming by investing in what they perceive as less risky places. We aren’t dumb, however, and have figured out that it’s a losing game to invest in bonds or CDs at rates less than inflation while we’re in tax brackets we never even knew existed.

So, farmland prices are booming. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the last seven years. According to Federal Reserve studies, farmland prices were up 15 percent last year in the most productive part of the Corn Belt, and 26 percent in the western Corn Belt and high plains. Closer to home, a neighbor planning his estate had an appraisal done in 2010 and again in late 2012. In that two-year period, the value of his farm had doubled. According to Iowa State economist Mike Duffy, Iowa land selling for $2,275 per acre a decade ago is now at $8,700 per acre. A farm recently sold in Iowa for $21,900 per acre.

A debt-to-asset ratio of 30 percent can enter dangerous territory with a land price drop of 50 percent, which sounds like a lot, until you remember that is a price level last seen only 24 months ago in much of the Midwest.

Although much of the increase in land prices has been driven by well-financed farmers and outside investors (many paying a large portion of the purchase price in cash), there are disturbing trends occurring on farm balance sheets…

[continues at The American]

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  • http://www.facebook.com/profile.php?id=1851341686 Zampano Poniatovii

    I love reading stuff from the American Enterprise Institute. Good post!

  • godozo

    The housing bubble removed millions of people from their homes, leading to the present issues with housing (stagnation in sales, many houses in lower income areas abandoned and gutted for metals within the houses, and many more multi-generational houses.

    I’d hate to see what happens to our food supply once this bubble pops.

  • BuzzCoastin

    to call those people farmers is an insult to farmers
    they are merely cogs in the Big Agra machine
    it’s called Agribusiness or Corporate farming
    they grow GMO corn & soybeans that are subsidized by Uncle Homeland
    for the benefit of Cargill and it’s ilk

    it’s a zero sum game rigged against them
    by subsided surpluses

  • InfvoCuernos

    Because you can’t really have a real depression without fucking up the farmers, right?

  • http://www.zoboprepublic.wordpress.com/ zobop republic

    “It’s made of people”.
    This is what we’ll be saying of our future food if farmers were to disappear.

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