Since I’ve now fully immersed myself into the world of food and farming, I thought it would be worthwhile sharing some of my finds.
Below you will find excerpts from three articles on what appears to be a farmland bubble (for the record, I am of the mindset that our entire economy is a bubble, farmland a small part of it):
1) Farmland prices: Is the bubble about to burst?: “Record-high prices for corn, soybeans, wheat and other commodities have left growers flush with cash to purchase more land. And what the farmers don't pay for out of their own pockets, historically low interest rates provide them with easy and cheap access to money to close the deal.
“The favorable mix of both cash and credit has provided fuel to drive up land values across the Midwest, stoking fears of a bubble ready to burst.
“In Iowa, where rich soil, favorable weather and ethanol and livestock production help foster demand for limited growing space, farmland values have soared 90 percent since 2009. An acre of farmland that a decade ago sold for an average of $2,275 now goes for $8,700, according to Mike Duffy, an economist at Iowa State University who watches land prices.
“It culminated last October when an 80-acre parcel near Boyden in Sioux County, some of the most fertile ground in the Corn Belt, sold for a record $21,900 per acre.”
2) Land Markets Need a Time Out : “From 2010 to 2012, Corn Belt states pegged 52% gains after adjustments for inflation, according to the Chicago Federal Reserve. In the decade from 2001 to 2011, ‘real’ inflation-adjusted values jumped 176% in Iowa, far outdistancing the record farmland markets from 1971 to 1981. Illinois and Indiana trailed those returns, but not by much.
“Artificially low interest rates pose one of the biggest risks to landowners, since land markets and interest rates almost always march in opposite directions. Today's near-zero interest rates could reverse abruptly once the Federal Reserve begins to unwind its unprecedented $4 trillion effort to jumpstart the general economy, Boehlje and other speakers warned.
“Farmers should be watching for early signs of a turning point in cheap interest rates, said Kansas City Federal Reserve economist Jason Henderson. ‘It's not 2013, or 2014 that worries me. It's 2015 or 2016 when farm incomes could be low and the huge wealth effect has set land markets for a potential bust.’”
3) The Next Real Estate Bubble: Farmland: “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. The Kansas Farm Management Association reports that debt-to-equity ratios are highest in large farms, which have over a million dollars in sales. Although the debt-to-asset ratio is low even in the largest farms in Kansas, it's higher than it was in 1979, shortly before the farmland crash of the eighties. As former home owners in Las Vegas and Southern California can attest, equity can melt away in a hurry. 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.
“The number of farmers in the Kansas survey with a 40 percent debt-to-asset ratio is higher now than it was in 1979, and those farms with a debt-to-asset ratio of over 70 percent are three times as numerous today.
“We farmers should be more sophisticated than the average subprime borrower and more risk averse than startup investors in the 1990s. After all, we manage multi-million dollar businesses, and since the average age of farmers is near 60, most of us are survivors of the agricultural asset crash of the early 1980s. In 1981, the average price of farmland in Iowa was $2,147 per acre; by 1986, the average farm brought $787 an acre….
“Interest rates are low because the Federal Reserve believes that low interest rates are the best way to help heal an ailing economy, or at least the best tool available to the Federal Reserve. Our economy is so fragile and our major banks so tenuously financed that the Fed thinks it has no choice but to risk a repeat of the early 1980s bubble in farmland, the 1990s tech boom, and the recent housing market bust….
“The Kansas City Federal Reserve recently had a symposium examining whether we are experiencing a farmland bubble. Bubbles are impossible to truly define until they burst, but when the Fed is sponsoring seminars on the topic, it occurs to this Eeyore that straws may well be floating in the wind. The ripples from a crash in farmland prices would not have the long-lasting effects on the economy that the subprime debacle did, but the chance of a crash in farmland prices should still concern policymakers. Farmers may well be collateral damage in the quantitative easing battle and are rightly worried that the next victim of our monetary policy will be wearing overalls when the music stops.”
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