Posted by Editor on February 8th, 2008
Posted In:
Bubbles,
Commodities,
Crash Prophets,
Currencies,
Dollar,
Economy,
Energy,
Farmland,
Housing,
Recession,
SpeculatorsEven though I live in the concrete jungle, I’ve heard that farmland prices have been doing phenomenal. On Monday, Lynn Hicks and Jerry Perkins of USA Today wrote that even though U.S. home prices continue to slide, the value of farmland is setting records. They noted:
Demand for grain for food, fuel and export, along with low interest rates and a weakened dollar have raised farmland prices by double digits the past two years. Average values have doubled since 2000.
Farm real estate prices rose 20% to 23% in Iowa, Nebraska, South Dakota and Wyoming in 2007, according to Farm Credit Services of America, an agricultural lender.
The Federal Reserve Bank of Chicago reports that prices rose 15% for the first three quarters of 2007 in its district, which includes Iowa and parts of Illinois, Indiana, Wisconsin and Michigan. That’s on top of a 14% increase nationwide in 2006 — to a record average of $2,160 an acre — the U.S. Department of Agriculture says. Figures for 2007 will come out in summer.
Predictably, investors have poured in. Murray Wise of the Illinois-based Westchester Group, which manages $500 million in client assets, told the publication that such growth has attracted “a tidal wave of investors.” Wise said, “It’s everybody from the person concerned about the stock market to large government and corporate pension funds, insurance companies, hedge funds.” Wise explained that the housing bust prompted lenders to shift capital from mortgages to agriculture. But farmland prices have also benefitted from the increased demand for ethanol as well as the low value of the dollar, which makes U.S. exports relatively cheap. He predicted farmland will appreciate 6% to 12% annually over the next three years, on top of an average annual farm income of 4% to 5%.
Apparently, investors are so sold on farmland they are even buying farmland in water-starved areas of Georgia. Ben Hudson of Atlanta-based Hudson and Marshall Auctioneers told Barron’s back on December 31, 2007, that, “People still strongly believe that land is a good investment. The drought had no adverse impact on prices.”
Coming to a farm near you…
After experiencing such a spectacular run-up in prices, could farmland be in a bubble? Jim McTague of Barron’s wrote:
You’ve lived through the tech-stock bubble. The dot-com bubble. The residential real-estate bubble. Now, get ready for the cropland bubble. At year-end 2007, farms- the latest count shows that the U.S. has 2,089,790- are what Miami condos and San Diego McMansions were at year-end 2004: properties so hot that they’re likely to have a meltdown in their future. As city slickers in many parts of the nation see the market prices of their homesteads deflate faster than a New Year’s party balloon, farmers are watching the values of their land swell by annual double-digit percentages. Nationwide, farmland prices skyrocketed 50% over the past three years, to an average of close to $2,200 an acre through August, according to the U.S. Department of Agriculture. While that’s the latest month for which federal data are available, there’s no doubt that prices are still sprinting ahead. Ground zero for the phenomenon could very well be Iowa, which, like a newly active volcano, sits at the center of a massive dome of rising farm and pastureland prices stretching across America’s heart and beyond, from Ohio to the Dakotas.
McTague explained what was behind this “new bubble”:
All bubbles have catalysts, real or perceived. The tech-stock boom was driven by the belief that technology was changing both our lives and investment realities. And the residential-realty boom was driven by faith that interest rates would stay very low and that the baby boomers’ wealth would keep the new, second- and vacation-home markets robust for decades.
The catalysts in the farmland bubble are federal subsidies to ethanol producers and the belief that ethanol demand will keep rising and that China’s and India’s new wealth will keep boosting global commodity prices.
Yet, there are those who would argue with McTague that U.S. farmland is not in a bubble. Mike Duffy, an economics professor at Iowa State University, told Barron’s that farmers are reinvesting their gains in additional acreage, meaning the market isn’t nearly as leveraged as residential real estate was, leaving it less prone to becoming a bubble. Furthermore, Duffy noted that farmers can lock in profits on futures exchanges at current prices going out two or three years. 2008 futures for corn, soybeans, and wheat reached new highs in late-fall and early-winter trading.
Some investors who got into the game early are taking profits. According to Duffy, 56% of Iowa farmland was owned by farmers between 2000 to 2005, while the remainder (44%) belonged to investors. Today, only 40% of the land is owned by investors. McTague talked about Steve Leuthold, who cashed in on the farmland he picked up dirt-cheap during the last bust. Leuthold, chief investment officer of Minneapolis-based Leuthold-Weeden Investment Capital, told Barron’s he sees ominous parallels between today’s farmland boom and those of the seventies and eighties. In Barron’s August 9, 1982, issue, he wrote a cover story entitled “Grim Reapers,” in which correctly called the top of the boom. However, his prediction of a 50% correction was actually too optimistic. Regardless, McTague noted that he ended up buying two Iowa farms at $600 an acre, 75% below their peak prices. Today, Leuthold sees a pullback of 15% to 20% in three to five years, since buyers are employing less leverage and interest rates are lower. However, he is concerned that the ethanol boom rests on shaky economic underpinnings.
McTague believes that the rush for ethanol is easily the biggest factor behind rising farm prices. And the most imminent threat to farmland values is the housing bust. Leuthold noted that, historically, a weakening in one part of the real estate market has affected all others. Already, ranchland and recreational farmland have suffered, having peaked in 2006. And if the U.S. economy goes into recession, that will add additional downward pressure on farmland prices.
Back on January 16, Creighton University economist Ernie Goss appeared on Radio Iowa and said that while housing remains troubled, the next market that needs to be approached with caution is farmland. Goss said:
While metropolitan land is declining in value for much of the nation, farmland prices are running above 15%, 15 to 20% growth per year. Now, that’s the next bubble we are likely to see burst. I don’t expect it to burst anytime soon but there are some real issues related to farmland prices.
McTague added, “At this stage, any investor should be wary of betting the farm on a farm.”
(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
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