|In a Bubble?|
Some Ag Land Prices
The primary problem with farmland price bubbles is no one knows for sure how inflated they are until they burst. That kind of event hasn’t happened often, but the current faster-than-normal increases in farmland values suggest the stage is being set for an encore.
A group of agricultural economists explored the issue at a recent University of Missouri seminar comparing today’s situation with what has happened in the past and what it all means for farmers.
While it’s not true everywhere, including Alabama, farmland prices generally have been rising led by double-digit percentage increases in much of the Corn Belt and Northern Plains states. Nationally, the average value per acre of farm real estate jumped 6.8 percent from 2010 to 2011.
In Alabama, as well as Florida and Georgia, farm real estate values have been slipping in recent years. South Carolina is the only Southeastern state where that’s not the case. There, the average value per acre dipped from 2008 to 2009, but has held steady since then.
The 2010-11 value declines in Alabama, Florida and Georgia were 2.4, 2.1 and 2.6 percent, respectively.
But the recent slippage in the Southeast doesn’t compare with what happened nationally when the two land price bubbles occurring in the past 100 years finally burst. In the 1920s, the farm economy collapsed after World War I and the value of farmland plunged 65 percent, leading to an agricultural depression nearly a decade before the stock market crash of ’29 triggered the Great Depression.
When the second bubble of the late ’70s and early ’80s ended, farmland prices dropped 39 percent.
The factors driving up land prices are well known. Declining farm acreage, farmers expanding their operations to gain more economies of scale, rising commodity prices boosted by strong global demand for food and the ethanol industry’s demand for corn, productivity gains, investors seeking a more reliable return and low interest rates have fueled the increase.
Federal Reserve Chairman Ben Bernanke has predicted low interest rates will continue through 2014. Uncertainty about the cost of borrowing after that, as well as the prospect of inflation, has led many land buyers to move forward aggressively.
Land prices have tended to decline when real interest rates (nominal rate minus inflation rate) go above seven percent, Dr. Ron Plain, professor of agricultural and applied economics at Missouri, observes.
Iowa has led the way in bidding up the price of farmland, recording an increase of 10.8 percent in a recent six-month period alone (Sept. 2011-March 2012). From 2000 to 2011, Iowa farmland value went from $1,857 per acre to $6,708, a 361 percent increase. That state also was the first to see a $20,000 per acre sale price, up from the previous record of $16,750.
For anyone thinking it may be time to buy early and heavy in farmland, caution needs to prevail.
When reading news of high land prices, those living outside the Hawkeye State should remember they are not in Iowa, advised Joe Horner, Missouri Extension associate professor of agricultural economics. Land-price questions require individual decisions and not all land is created equal. The same answer won’t fit everyone.
Measuring one’s ability to take on land-buying debt based on the price of the commodity to be raised is a reasonable strategy, Horner noted. The problem is what price should be used. Possibilities include the historical average price over a given number of years, last year’s price, last month’s price or prices projected by economists for 10 years ahead. They all differ, he explained.
And while commodity prices may vary, production costs have a habit of moving up, Horner added.
Ray Massey, Extension professor in agricultural and applied economics at Missouri, urged potential investors to remember all bubbles eventually end and the price of anything inevitably returns to its inherent intrinsic value. Rather than making a "buy" decision based on optimism spurred by current profits, Massey suggested such a move should be analyzed as carefully as any other business venture.