Feds Try to Keep Farmland Bubble From Popping

Wednesday, 09 Mar 2011 09:33 AM

By Michael Carr

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Farmland prices have skyrocketed, along with the price of food.

At the end of 2010, Iowa State University reported that land values averaged more than $5,000 an acre. Recent articles in The New York Times tell of sales at more than $10,000 an acre becoming more and more common.

The Federal Deposit Insurance Corporation, trying to demonstrate a new-found vigilance after failing to spot the housing bubble, is warning banks that they shouldn’t extend too much credit to aspiring farmland owners.

Price history shows that the FDIC may be late to the party, despite the agency’s chief economist assuring the Times that “if it were to be a bubble, it would be in its formative stages.”

Anecdotally, prices have doubled in the past year. The global economic crisis seemed to have had little impact on farmland, as prices doubled from 2004 to 2010 and have seen only two down years since bottoming at $787 an acre in 1986. Declines averaged about 2 percent on those years and investors enjoyed steady appreciation of 8 percent a year.

That was about 1 percent a year better than the S&P 500, with significantly lower volatility.

Looking ahead, the FDIC may have good reason to worry. Prices showed a similar price rise in the 1970s, but declined about 60 percent into that 1986 bottom. Falling prices at a time of rising interest rates led to many bankruptcies and prices needed 17 years to recover their losses.

Maybe this time is different and federal regulators have spotted a bubble before it bursts, like they seem to believe they have. But some economists caution that believing this time is different leads to certain ruin.

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