Yes, Farmland Prices are a Bubble
The following eye-opening chart is from the American Enterprise Institute for Public Policy Research’s article, “A Bubble to Remember — And Anticipate?” by Alex J. Pollock:
Farmland returned almost 8% a year on average between 2000 and 2011 according to the U.S. Department of Agriculture.
The Federal Reserve Bank of Kansas City came out with its quarterly “Agricultural Credit Conditions” survey report last week. Farm profits are affected by required input costs and the comments related to input costs are concerning out of this district report. Tenth District bankers issued an earnings warning, “Farm incomes fell sharply during the quarter as escalating feed and fuel prices pushed production costs higher. … Rising input costs and lower income led to stronger loan demand for all sectors of the District’s agricultural economy.” One Eastern Oklahoma banker put it this way, “Gross income looks good for agriculture but the margins are continually being squeezed by the increasing costs of the inputs.”
Tenth district bankers reported that the severe drought had little effect on the demand for farmland. “Nonirrigated cropland prices rose nearly 25 percent above year-ago levels in the third quarter, and irrigated land values remained more than 20 percent higher than 2011 levels. In addition, ranchland values appreciated an average of 14 percent during the past year.”
The Goss Institute issues monthly reports on economic conditions in the Midwest. The following quote by Ernie Goss is from its most recent (October) report:
“Farmland prices and cash rents are soaring at what I believe are unsustainable paces. For example, last month there was an auction of cash rent contracts in southeast Nebraska. Contracts went for a record $550 per acre per year for non-irrigated land. Right now we are seeing cash rents and farmland priced for perfection. Land prices and cash rents will be heavily dependent on 2013 drought conditions, agriculture commodity prices and interest rates. Any of these three factors could be a significant issue or problem for the Rural Mainstreet economy in the months and years ahead.”
The Federal Reserve Bank of Chicago is reporting that “For the third quarter of 2012, the year-over-year gain in District agricultural land values was 13 percent—the smallest increase since 2010. Iowa’s farmland values continued to lead the District, with a year-over-year increase of 18 percent.”
Farmland values in the St. Louis region averaged $6,003 per acre in the third quarter, according to a survey by the Federal Reserve Bank of St. Louis. This District’s bankers reported that subsidized crop insurance, which is required on all farmland loans, was contributing to higher profits this season than last, but that livestock producers were hurting from high feed costs due to the drought and ethanol policy.
Nebraska UNL Extension Educator Allan Vyhnalek said, “Greed is a powerful negative emotion that’s causing some of our problems here.” He was addressing Nebraska farmers about problems establishing fair rents in this environment.
Land prices are outpacing rental rates which should raise some alarm bells. The WSJ recently quoted Greg Page, Iowa farmland owner and Cargill’s CEO. Page estimates the multiple of farmland value to rents in his region has climbed from about 10 times 12 years ago to 22 times or more today. Yet, the farmland debt-to-equity ratios are much lower today, at 11.4%, than in the mid-1980s when they were 30%. The low interest rates of recent years have been a major contributing factor for today’s prices.
Another factor to consider is the upcoming drastic change in estate and capital gains taxes. Legal advisers are saying “sell” your farmland before year-end, since capital gains taxes will rise from 15 percent to 23.8 percent and deductions on estate taxes will drop from $5 million to $1 million.
Many of the tiresome reasons that are repeatedly given to defend the ongoing investor interest in farmland tend to ignore some basics, most of which are mentioned in the above few paragraphs. Today’s policies are what are making farming and owning farmland profitable, not the growing populations of the world.
Photo credit: Flickr CC via tyleruk2000