by Chas Bonner
On October 18, Sheila Bair, chairman of the FDIC warned that the next asset bubble that could pop might be farmland. She stated that US farmland had escalated in price 58% since 2000. She has asked the FDIC to closely monitor farmland value for signs of instability like bubbles in housing and the stock market. She stated “A sharp decline in farmland prices similar to the early 1980’s could have a severe adverse impact on the nation’s 1579 farm banks.”
Much of what is driving this cost escalation are large pension funds, endowments, and institutions that are purchasing. We now sense some abatement in that pressure, since knowledgeable people are very aware of bubbles, having just gone through the housing and commercial real estate crises. Furthermore, commodity pricing has not followed land pricing on a consistent basis.
We have noted that most of the rapid price increase is occurring in the Corn Belt, primarily the eastern part that does not need irrigation. In Iowa, Illinois, Indiana and adjacent states, many farms have traded in the $5-7000 per acre range for raw ground with few or no improvements. Another area of rapid price increases is orchard ground in the far West.
However, we cannot forget that we are average temperature when one foot is in the fire and the other in a bucket of ice. So let’s look at some disparities. For instance, in 2007 the average price of farm ground in Illinois was $4460 per acre, $1000 in Montana, $3100 in Idaho, $3300 in Nevada, and a whopping $10,600 in Arizona, higher than any other state (per USDA figures, and 2007 are the most recent comparative figures we have).
Rather than comment on a national bubble, we should look at the location, crops grown, water rights and usage, soil productivity, output per acre, and relative regional values. There is no doubt that farmland has increased tremendously in price in the past decade. But the real question should be whether the land is worth it in your region, can you make a consistent profit at the price asked, does commodity pricing have a likelihood of increasing or holding firm, and will your asset grow or at least hold steady in value over the next 10-20 years?
Most of those questions are imponderable, so the astute investor says “BE CAREFUL.”
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