Long time readers know what I stated 3 years ago as potentially the best long term investment on earth (hint, it is in the title of this piece). I am beginning to read quite a few stories about farmland in the popular press of late - quite interesting. Bubble territory already? Hmmm, call me when TLC rolls out Flip That Corn Field or Bravo announces The Housewives of Omaha - then it may be time to unload some of that merchandise on those city slickers! ;) Or more likely.... when NYC starts rolling out a bevy of Farmland hedge funds.
- The 80 acres of rich farmland that Jeff Freking and his brother Randy bought near Le Mars, Iowa, on Monday for $10,000 an acre would seem to have nothing in common with a condo in Miami or a house in Las Vegas.
- But as prices for agricultural land surge across America’s grain belt, regulators are warning that a new real estate bubble may be forming — echoing the frothy boom in home prices that saw values in Miami and Las Vegas skyrocket and then plummet.
- “It just seems to be going up in leaps and bounds here,” said Jeff Freking, who bought a similar farm, also in northwestern Iowa, for $6,000 an acre just two years ago. “Everybody thinks it’s crazy.”
- The surge in prices has been dizzying throughout the Midwest, with double-digit percentage increases last year in Illinois, Indiana, Iowa, Kansas, Minnesota and Nebraska. In parts of Iowa, prices for good farmland rose as much as 23 percent last year, according to the Federal Reserve Bank of Chicago.
- Just a few years ago, farmers marveled as land prices began to rise in response to demand for corn to make ethanol. More recently, soaring prices for wheat, corn, soybeans and other crops have driven the increase.
- Average grain prices, adjusted for inflation, are nearing the giddy levels they reached in the late 1970s, the peak of the last disastrous boom-and-bust cycle for agricultural land.
- “History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets,” said Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, in testimony before the Senate Agriculture Committee last month.
- Officials at Mr. Hoenig’s bank warn that farmers face a “huge” risk that rising interest rates, perhaps combined with falling crop prices, could undercut land values. Farmland values could drop by a third to a half in such a situation, Mr. Hoeing testified.
- Prices have risen so far so fast that “it’s getting scary,” said Mike Green, a real estate auctioneer. He brought the hammer down last Friday on a 118-acre farm in Yetter, Iowa, that sold for $11,000 an acre, which he said was a record for farmland in Calhoun County, in western Iowa. In December, Mr. Green said, he got oohs and ahs when a parcel went for $9,300 an acre. Last fall, similar farms were selling for less than $8,000 an acre. “It’s very hard to guess what a property will sell for these days because it seems like it’s been changing on a weekly basis,” he said.
[click to enlarge]
- Farmland values have been pushed up by several factors. As crops like corn, wheat and soybeans bring higher prices, the land on which they are grown becomes more valuable. Low interest rates have also contributed; they draw investors seeking an alternative to low-yielding certificates of deposit and the volatile stock market as well as create an incentive for farmers to buy more land rather than invest their profits elsewhere. (Thanks Bernanke - more distortions of our economy at every corner)
- “Farmland has been a favored asset class in a world where a lot of other asset classes have fallen out of favor,” said Richard A. Brown, chief economist of the Federal Deposit Insurance Corporation. “If it were to be a bubble,” Mr. Brown said, “it would be in its formative stages.”
- Today’s farmland market has some crucial differences from the 1970s bubble and the housing boom of the last decade. In the 1970s, another period of low interest and high crop prices, farmers loaded up on debt, using their farms as collateral. In the housing bubble, many buyers were seduced by gimmicky loans, such as subprime mortgages with floating rates, that magnified risk. Today, farmers have about one-third less debt over all than they did at the peak of the last boom, according to U.S.D.A. data.
- But a big worry for regulators is that farmers will start taking out loans on property they already own, based on today’s elevated values, and use it to buy more property or make other purchases. That would be similar to what farmers did 30 years ago and what homeowners did in the housing boom. (agreed - essentially this is akin to buying stock on margin .... or buying that Phoenix condo on your 2nd mortgage) Jason R. Henderson, a vice president at the Omaha branch of the Kansas City Fed, said he had heard reports from bankers that such a pattern might be emerging.
- The rising prices have also brought in speculators. A survey by Iowa State University found that investors made a quarter of farm purchases in the state last year, a slight increase from 2009. “It’s been very aggressive as far as bidding action,” said Todd Hattermann, an auctioneer who sold a farm in Paullina, Iowa, about 30 miles from Le Mars, for $9,600 an acre last week. Investors, he said, were “running the values up. A lot of them may not be the final bidder but they’re bidding all the way through.”
- There is no agreement on whether a bubble is emerging. Michael D. Duffy, an agricultural economist at Iowa State University who conducts the annual land value survey, said the market appeared fundamentally sound and that land prices were responding properly to high crop prices. “If you’ve got good ground, it’s worth a lot of money,” he said.