Will U.S. ag bubble pop?
A few economists and agriculture market watchers have started warning the U.S. agriculture industry that the ag/farm bubble may be about ready to burst. Most recently, Ernie Goss, Creighton University economist, warned that Iowa’s ag economy would likely be hit because of the European recession and growth in farmland has slowed.
However, the good news amid the bad is that Goss does not expect the ag economy to be worse than the Farm Crisis of the 1980s. He makes a distinction between what happened in the 80s and what is happening now. In the 1980s, more people bought farmland on credit while interest rates were high.
Goss told RadioIowa, “Agland purchases now are a lot to do with cash. This is not over-leveraged farmers who are borrowing from the bank to buy the land which is based on a significant growth rate. That’s not what we’re seeing. That said, I still expect some of the air to come out of the bubble because of potentially higher interest rates and lower agricultural commodity prices.”
Goss isn’t the only market watcher who’s predicting the ag bubble will pop. Macquarie Agricultural Funds announced in December it expected U.S. farmland prices may head toward a downward correction in 2012. Daniel Hough, agricultural product specialist with Macquarie said, “a bubble may be building up and there is a cause for caution because returns are getting squeezed.”
Hough said cheap availability of debt, because of lower interest rates, have helped push up U.S. agricultural land prices. But with diminishing returns, investors are turning toward South America and Eastern Europe where capital cost per unit of crop production are lower and sales competitive.