Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Wednesday 11/21/12

DTN Ag Business Benchmark: Land Leaves Stocks, Housing in the Dust

HADDONFIELD, N.J. (DTN) -- Bubble watchers continue to debate whether farmland's extraordinary 10-year returns mean a collapse is imminent, or even whether it could replicate the depths of the 1980s credit crisis.

When adjusted for inflation, farmland values have been on an upward trajectory for the past 17 years. But unlike housing and stock prices, they dodged corrections in 2007-2009. (Chart courtesy of the American Enterprise Institute)

So far, the bull market in farmland has shown little signs of pausing: The winning bidder in McLean and Ford County, Ill., auction last week paid $8.2 million for 750 acres, or $10,947 per acre. Iowa farmers have paid $15,000 to $20,000 for small auction parcels in recent weeks, and even some counties in North and South Dakota have crossed the $10,000-an-acre threshold.

Over the last decade, farmland in the core Corn Belt has appreciated about 275% to 300% -- far outdistancing alternative investments such as stocks or even housing. What's more, farmland has dodged the setbacks that afflicted other assets when their bubbles burst from 2007-09.

"This market is for real, and nothing seems to faze it. Not a drought. Not pundits calling it a bubble. As long as the business case for farmland continues to make sense -- and it does -- farmland will continue to be a sound investment," says Murray Wise, CEO of the firm that managed the Illinois auction.

Ag economists justify the decade's super-heated gains based on higher farm incomes and record-low interest rates, but those are the same excuses the Federal Reserve Bank of New York used when rationalizing higher home values throughout the 1990s, cautions Alex Pollock, a resident fellow at the American Enterprise Institute, in a new study.

"If you are 35, nominal farmland prices have been rising since you were 10. How does anyone under the age of 40 subjectively assess the probability of a price collapse?" Pollock asks.

Doug Stark, CEO of Farm Credit Services of America, sees little parallel to farmland's last debacle. "It might be an asset bubble, but it's not a leverage or a credit bubble," Stark insists. "Land is being purchased today from a position of strength. We are not seeing the leverage that was used in the housing market, or even in the 1980s farmland market. People are putting significant cash into current farmland purchases."

Unlike the 1980s when farmers lacked long-term fixed-rate financing, more than 75% of FCSA customers have real estate loans locked in with long-term rates of interest, Stark says, and most have opted for rates secured for 10-20 years. From a lender's standpoint, "that is somewhat comforting," says Stark, "and a major difference from the 1980s."

Pollock agrees that distinction could make for a softer landing, when and if farmland values eventually retreat. "It clearly makes a difference whether a bubble is a price bubble, or and leveraged price-and-credit bubble, as you say. The latter being much worse," Pollack notes. "Contrast the results of the dot.com bubble vs. the housing bubble, both bad, but the latter much more destructive."

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business blog.

Marcia Taylor can be reached at marcia.taylor@telventdtn.com

Follow Marcia Taylor on Twitter@MarciaZTaylor.


Posted at 7:18AM CST 11/21/12 by Marcia Zarley Taylor
Comments (3)
I smell a bubble forming when the land in the Eastern Dakotas brings similar prices as land in Illinois.
Posted by Matthew Schreurs at 9:37AM CST 11/21/12
Good article. But you left out a lot. I am a California Cattle Rancher, 69 years old, good perspective, seen bubbles. This isn't one, or at least a normal one. Subsidized corn was responsible for more agricultural ills than any other moronic institution ever conjured by government. It's gone now, or at least the impact of them, but only due to another set of direct and indirect subsidies centered on ethanol, again moronic in origin. In 1961, I learned from a past-retirement age professor, Dr. Mumford, at Oregon State about the macro-economics of producing past the point of rising industry returns, where producing more means earning less. I am sure every ag major at every institution of higher learning in the U.S. heard a similar lecture. Why it didn't stick with most I'll never know. Subsidized corn coming out of our ears (pun perhaps intended), was responsible for the development of the U.S. feeding industry and not the other way around. But it was the ancillary impacts of what IBP's Jim Peterson called a free commodity that were so devastating. Ranchlands in the U.S. and even all over the world werehighly devalued because you could feed 'um cheaper than you could graze 'um attitude that entrenched itself within the U.S. livestock industry. .. So if you want to look where land values are going, you need to look at where corn will be going and whether the cry-baby conservative Midwest farmers seek to raise subsidy net to whole new levels or not. Meanwhile, for the first time in 40 years my ranch has become profitable, not because cattle prices have risen but because feed values have risen. --H. Clay Daulton
Posted by Marcia Taylor at 8:06PM CST 11/25/12
This isn't a bubble like any other. Land prices are going wherever cash or other "frightened assets" decide to take them! Sometimes supply/demand will scare you to death! By the way ----- if you like feeding DDG's to livestock then stop trashing ethanol!
Posted by Roger Cooper at 8:33AM CST 11/27/12
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