Farmland bubble? 10-year rise raises red flags

 

21 10월, 23:21www.marketwatch.com

 

 NEW YORK (MarketWatch) — Farmland prices have been on a tear for over a decade, barely slowing as the rest of the country suffered a housing collapse, leading economists and investors to worry that a dangerous bubble is forming in the heartland.

 

 The average acre of Iowa farm real estate rose 20% in value to $8,400 in 2013, according to the U.S. Department of Agriculture. That’s up from $3,850 in 2009, and data show overall farmland prices have been on the rise for more than a decade. It’s a similar story across the Corn Belt and the Northern Plains. But it takes more than a string of big gains to blow a bubble. And while some farm real-estate professionals are wary, they argue that the evidence doesn’t justify bubble fears – at least not yet.

 

 “In general, if you ask, is farmland in a bubble, I’ll say, no,” said John Taylor, national farm and ranch executive for U.S. Trust, a private bank that is part of Bank of America Corp. “But if you ask, are some people paying bubble prices, I’ll say, yes.”

 

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 There are strong fundamental reasons behind the run-up in farmland prices. First off, farm income has surged over the last decade as commodity prices boomed. Ultralow interest rates also help.

 

 But now, commodity prices are setting back and interest rates have started to move higher, albeit from very low levels. That’s why the next year or two will provide an important test.

 

 “This is the moment of truth, I think,” said Brent Gloy, an agricultural economics professor at Purdue University in West Lafayette, Ind. If prices continue to surge in the face of intensifying headwinds, it would then be a troubling sign that a bubble was building in farmland, he said.

 

 Up until recently, however, farmland values have risen in the midst of what could be termed a positive perfect storm, Gloy and others noted.

 

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 The so-called commodity supercycle saw prices for corn, wheat and soybeans soar as China and other emerging markets sucked up an increasing share of commodities from around the globe. Demand for biofuels added to gains for corn. Meanwhile, interest rates fell sharply as the Federal Reserve cut official interest rates toward zero in response to the financial crisis.

 

 The Department of Agriculture has forecast 2013 national farm income to rise 6% to $121 billion, around $3 billion above the previous record set in 2011.

 

 Ultralow interest rates have affected farmland prices in more ways than one, noted Jim Farrell, president and chief executive of Omaha-based Farmers National Company, a farm-management and land sales firm.

 

 Low rates make it cheaper to finance land purchases, but they’ve also fueled a hunt for yield that’s helped boost demand for farmland. At the same time, worries that there will be nowhere to park the proceeds from a farm sale have helped limit the supply of farmland on the market, he noted.

 

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 Mike Walsten, who tracks prices as editor of the Land Owner newsletter in Cedar Falls, Iowa, said that farmers are finding it “a little more difficult to get the prices they got six months ago.” He noted, however, that he and many others had anticipated a softening of the market last year, only for a drought to send crop prices soaring. Now, a softer market for farmland is most evident in Iowa and southeastern Minnesota, where the growing season has been especially difficult, Walsten said. There have been “no sales” at auctions where prices didn’t meet minimum bid expectations.