Farmland prices: Boom or bubble?

decrease font size  Resize text   increase font size       Printer-friendly version of this article Printer-friendly version of this article

Recent years have produced prices for both farmland and pasture land that reached unprecedented levels. Can the trend continue – or is it a real estate bubble in the making?

A new report from the American Enterprise Institute for Public Policy Research examines current patterns in price of land.

Alex J. Pollock, resident fellow at the American Enterprise Institute, says the current U.S. farmland market is showing patterns similar to the market bubble of the 1970s. Calling the event the “great U.S. farmland bubble of the 1970s,” Pollock notes that prices peaked in 1982 before real prices fell back to their level of 15 years earlier “while defaults and insolvencies escalated.”

Pollock, who spent 35 years in banking and was president and chief executive officer of the Federal Home Loan Bank of Chicago from 1991 to 2004, said, “Trends from the past two decades suggest we may have entered another such bubble. Real farmland prices have been climbing over the last 17 years and are now higher than at the peak of the previous bubble. Analysts and experts are reluctant to declare this a bubble, and plausible economic reasons for current prices have been proposed. But it is also plausible to imagine price dropping again.”

Specifically, Pollock says the Federal Reserve’s record-low interest rates have contributed to inflation in the market prices of farmland, and he believes when interest rates begin to rise, farmland prices may drop.


Buyers Guide

Doyle Equipment Manufacturing Co.
Doyle Equipment Manufacturing prides themselves as being “The King of the Rotary’s” with their Direct Drive Rotary Blend Systems. With numerous setup possibilities and sizes, ranging from a  more...
A.J. Sackett Sons & Company
Sackett Blend Towers feature the H.I.M, High Intensity Mixer, the next generation of blending and coating technology which supports Precision Fertilizer Blending®. Its unique design allows  more...
R&R Manufacturing Inc.
The R&R Minuteman Blend System is the original proven performer. Fast, precise blending with a compact foot print. Significantly lower horsepower requirement. Low inload height with large  more...
Junge Control Inc.
Junge Control Inc. creates state-of-the-art product blending and measuring solutions that allow you to totally maximize operating efficiency with amazing accuracy and repeatability, superior  more...
Yargus Manufacturing
The flagship blending system for the Layco product line is the fully automated Layco DW System™. The advanced technology of the Layco DW (Declining Weight) system results in a blending  more...
Yargus Manufacturing
The LAYCOTE™ Automated Coating System provides a new level of coating accuracy for a stand-alone coating system or for coating (impregnating) in an automated blending system. The unique  more...
John Deere
The DN345 Drawn Dry Spreader can carry more than 12 tons of fertilizer and 17.5 tons of lime. Designed to operate at field speeds up to 20 MPH with full loads and the G4 spreader uniformly  more...
Force Unlimited
The Pro-Force is a multi-purpose spreader with a wider apron and steeper sides. Our Pro-Force has the most aggressive 30” spinner on the market, and is capable of spreading higher rates of  more...
BBI Spreaders
MagnaSpread 2 & MagnaSpread 3 — With BBI’s patented multi-bin technology, these spreaders operate multiple hoppers guided by independent, variable-rate technology. These models are built on  more...


Comments (10) Leave a comment 

Name
e-Mail (required)
Location

Comment:

characters left

michael    
kansas  |  November, 16, 2012 at 10:13 AM

Well of course it's a Bubble! Even currently high commodity prices, historically unsustainable, are not sufficient to cover costs and anyone with basic math skills know this. Misleading claims from brokers and wall street investment advisors (with skin in the game) that there is a 17% ROI have drawn ignorant investors with no experience or understanding of agriculture. Same old game, same old suckers, same result waiting in the wings. It's simply a matter of time.

Bob Cox - Kiowa Creek Land & Cattle Co. Inc.    
Scottsbluff, Nebraska  |  November, 16, 2012 at 11:15 AM

The current run-up in land prices has almost NO parallel to the situation of the late 1970s, early 1980s. Back then, lenders paid scant attention to cash flow and relied on inflated balance sheets. The folks who are buying land in the current day are putting CASH on the line. No lender will currently lend more than 50% of the purchase price and the borrower had better have adequate cash flow to carry the purchase. This is not to say that land prices cannot decline, but if they do, it will be the result of interest rates on CDs rising and/or commodity prices trending down. It will NOT be because of foreclosures on folks who borrowed money far beyond their ability to repay the debt. Current land buyers have real skin in the game. They simply feel their money is safer and better invested in land, rather than getting less than 1% on a CD.

VJ    
Minnesota  |  November, 16, 2012 at 11:45 AM

The low interest money that FSA is lending to young start up farmers is a huge problem for increasing land prices. This may not be exactly the same as the 1970's but it is sure moving there fast.

michael    
kansas  |  November, 16, 2012 at 01:09 PM

Bob - You're right about the drive to buy, but what happens as the economy recovers and CDs/Other investments inevitably rise (just like commodities will lnevitably fall)? Selling land isn't like trading stocks and bonds. You can't just electronically notify a trader and change your position. So there'll be protracted messy years of sales and auctions while values augur into the ground and losses taken by those who can afford them. You're also right about the current market being cash based, and will be a "better" crash because no banks will be going down the tubes. However, the Equity/Value of current buyers will take a monstrous hit. And I doubt that farmers or land investors will be overjoyed or living high when they see their equity drop by 50% or more - you? If you doubt it, ask everyone who built their retirement and estate plans around their IRA, 401k holdings and the value of their "Million Dollar" paid-up home's equity 6 years ago. Bubble = Pop!

michael    
kansas  |  November, 16, 2012 at 01:09 PM

Bob - You're right about the drive to buy, but what happens as the economy recovers and CDs/Other investments inevitably rise (just like commodities will lnevitably fall)? Selling land isn't like trading stocks and bonds. You can't just electronically notify a trader and change your position. So there'll be protracted messy years of sales and auctions while values augur into the ground and losses taken by those who can afford them. You're also right about the current market being cash based, and will be a "better" crash because no banks will be going down the tubes. However, the Equity/Value of current buyers will take a monstrous hit. And I doubt that farmers or land investors will be overjoyed or living high when they see their equity drop by 50% or more - you? If you doubt it, ask everyone who built their retirement and estate plans around their IRA, 401k holdings and the value of their "Million Dollar" paid-up home's equity 6 years ago. Bubble = Pop!

rick    
November, 18, 2012 at 06:53 AM

When NPR starts running stories about doctors from Miami investing farmland in Illinois and how much money they are making you can bet it is a bubble and the end can't be far away.

Kathy    
Illinois  |  November, 18, 2012 at 09:50 AM

Simplistic, but true.

Dave    
Des Moines, Iowa  |  November, 19, 2012 at 03:03 PM

It's the ROI, dummy! Michael is right on. The people buying at these ridiculous prices are investors, not farmers. When commodity prices return to "normal" and interest rates rise again, there will be much better ROI opportunities elsewhere, and the investors will try to exit the market, causing a collapse of the prices. I can't wait...

Chris    
CalgaryAlberta  |  November, 20, 2012 at 02:09 AM

This is not the situation of the late 70's/early 80's at all. The bubble was farmers leveraging their equity further and further, depleting their balance sheet and starving their cashflow, and when interest rates tripled in a very short time, and commodities tanked at the same time, there was a pop as the bubble burst.. Today, farmers are much more business savvy, their balance sheets are very strong from coming off some very strong years. They hve expanded but only as their balance sheets allow it. Investors are deploying cash, because it is safer than anything else they know of in a possible inflationary economy. They are not leveraged at all. Commodity prices are staying strong and the world reserves are not catching up. Over the past 5000 or so years, it has always been the landlords who did well through thick and thin. Selling farmland is silly. Put it into a family trust, and rent it out. It will always be a great asset.

CRS    
SD  |  November, 27, 2012 at 03:06 PM

You are wrong. Investors are not buying. Farmers are driving the prices through the roof all on their own. In the midwest, 95% are sales to farmers.


1325 Bushel Grain Cart

Equipped with a 22” computer balanced auger with 5/16” flighting,the unloading speed is 50% faster than smaller grain carts with ... Read More

View all Products in this segment

View All Buyers Guides

Feedback Form
Feedback Form