Tuesday, November 20, 2012

The Farmland Bubble

From Big Picture Agriculture, where the post was titled, "Yes, Farmland Prices Are A Bubble:"

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.
The crop prices can't keep going up, and neither can the land prices.  However, 156 acres across the road from one of our farms sold today.  The farm was sold in two parcels, and the owners took sealed bids for each.  The top 4 bidders for each piece got a chance to raise their bid to be the leader on each piece.  Then any of those bidders could bid above the combined total for the whole farm.  I submitted a couple of bids straddling $5300 an acre, with the intention of bidding up to $5600 an acre for the whole thing.  I failed to make the top 4 on either piece.  The winning bid was $8000, or $1.25 million.  My understanding was that most of the bidders were from the closely-knit (read inbred) agricultural area north of us.  The winning bidder was one of the largest farmers in our county, and the landowner told me that this farmer said that the out-of-towners pissed him off, and he wasn't going to let them win.  All I know is that I didn't feel really comfortable with $5600 an acre, so $8000 was way out of my league.  They might not make any more land, but there will always be some up for sale.  I guess I'll just have to wait.

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