Farmland: Another Real-Estate Bubble?

Mon, Mar 10, 2014 - 8:51am

Supported by high agricultural commodity prices and low interest rates, farmland prices more than quadrupled in Iowa during the decade from 2000 to 2010:

Source: Wall Street Journal

Average Iowa land prices now sit at about ,700 per acre.

Trend Beginning to Soften?

There is some evidence that the trend is softening a bit in the areas where it has been stratospheric. In the territory covered by the Chicago Fed (all of Iowa, and most of Illinois, Indiana, Michigan, and Wisconsin) prices were up “only” 5 percent in 2013, versus 16 percent in 2012.

However, while not as elevated as prices in Iowa, prices in the territory covered by the Federal Reserve Bank of St Louis (including Arkansas and parts of Missouri, Mississippi, Tennessee, Kentucky, and Indiana) continued to rise dramatically last year — finishing 12.2 percent above 2012.

78 percent of the farms sold are sold to farmers, rather than to speculators. But it still seems likely that prices are being driven by the desire to park cash in land.

[Hear More: Ned Schmidt: 2014 Will Be the Year of Commodities]

Farmers and lenders alike are beginning to suspect that these prices have gotten too elevated. When hard numbers are calculated for corn and soybean prices, and the costs of inputs, it begins to look like the economics simply don’t make sense.

Farmers Are In Better Shape

A repeat of the 1980’s farm fiasco is probably not in the making, since farmers’ finances are much more solid than they were in the “Farm Aid” era.

For our part, we look at this phenomenon and wonder what it would suggest about inflation expectations if it continued to develop. And if, as we believe, 2014 does not promise a sharp decline in agricultural commodity prices, the current softening of farmland prices might reverse.

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