Tags: farmland | bubble | corn | farmers

USA Today: Is There a Bubble in Farmland Prices?

Monday, 01 Apr 2013 07:58 AM

By Michael Kling

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A bubble in farmland prices may be about to burst, some fear.

Prices of farmland have skyrocketed, exploding 90 percent since 2009 in Iowa, according to USA Today. Farmland prices have increased from an average of $2,275 an acre 10 years ago to $8,700. One 80-acre property sold for $21,900 an acre last October.

“The concern clearly is not so much how much higher are they going to go, but when this bubble breaks, how low will they go and what will the aftermath of that be?” Michael Hein, vice president of the Liberty Trust and Savings Bank in Durant, Iowa, told USA Today. “If profits start to diminish, there will be an impact on land values as well.”

Video:
Economist Predicts 'Unthinkable' for 2013 


Increasing farmland prices are unsustainable, Hein added.

Record-high prices for crops like corn, soybeans and wheat as well as record-low interest rates that provide cheap financing are driving the escalating farmland prices.

Unlike in the previous boom, farmers now typically put 50 to 75 percent down when buying so have substantial equity. Their debt-to-asset ratios are expected be the lowest ever this year, USA Today reported.

“The shock absorber is the enormous amount of farmer capital that they have invested in real estate,” John Blanchfield, a senior vice president and director of American Bankers Association’s Center for Agricultural and Rural Banking, told USA Today.

On the other hand, farmers often have little liquidity, or just small amounts of funds readily available in bank accounts, preferring to invest their money in land. If crop prices plunge, they may lack the savings needed to tide them over.

Farmland prices could drop — and drop a lot — if interest rates rise or commodity prices fall. Plus, costs of farming supplies like seed, fuel and fertilizer are rising, crimping farmers’ profit margins.

Real estate brokers told The News-Gazette, which covers East Central Illinois, that they fear a bubble.

“My opinion is we’re sitting on a bubble. I think that bubble could break any time the corn goes down to $4 or something like that,” Bill Kruse of Bill Kruse Auction Service, told The News-Gazette. “When it’s going to break, nobody has that knowledge.”

Still, brokers expect prices to continue to increase this year.

“At these prices, it’s just scaring me at the moment,” Murray Wise of Murray Wise Associates told the newspaper. He advises potential buyers: “Use caution, caution and caution. The volatility of this thing could really kill you.”

Video:
Economist Predicts 'Unthinkable' for 2013

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