Is A Farmland Bubble Forming?

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The story so far: the Federal Reserve in Kansas City mid-2013 published that irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. Last year’s drought in Iowa last year notwithstanding, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska, says the Fed, have also doubled during the same period.

There’s a complicated set of factors joining together to drive up farmland prices. Drought, institutional buying, ethanol mandates from the federal government, rising food prices and population concerns are all having their say in a steadily rising price for irrigated cropland. Some are saying the trend is unsustainable and shows all the signs of a classic market bubble. Troublingly, different looks at the market come to similar conclusions about a coming price collapse even if there’s disagreement about cause.

Institutional Players

As Reuters reported recently, a report by The Oakland Institute documents a “global land rush of unprecedented scale” and estimates $10 billion in institutional dollars is chasing the fixed amount of US cropland.  Pension giant TIAA-CREF, Hancock Agricultural Investment Group and UBS Agrivest were singled out as key drivers of a surge in farmland prices.  This financialization of food-producing land is identified as “speculative” by the report.

Generational Turnover And Tight Credit For Small Farmers

Another trend feeding the charge toward institutionalized demand for land is the plight of the young farmer. A 2011 survey published by the National Young Farmers Coalition found that 78% of young farmers cited lack of capital as their biggest challenge.  Depending on off-farm income to make ends meet only further sweetens the deal to a young farmer when an institutional player comes calling to pad its asset holdings.

Biofuel Mandates

In 2005, Congress passed the Energy Policy Act of 2005, setting the stage for later mandates by the Environmental Protection Agency to compel an increase in the production of ethanol, the corn-based fuel. The EPA’s RFS and later RFS2 programs sought to almost quadruple ethanol production. The effect of government policy into land prices is highlighted by one analyst at Seeking Alpha when he points to a spike in land prices that occurred in the 2005 quarter the bill passed.

While that price move explanation seems valid, what’s less clear is any similar ongoing related effect of ethanol mandate on corn-producing land prices in the intervening nine years. As per usual, when it comes to explanations of prices from institutional sources, only some actors get attention. The Wall Street spin evident in the above-linked piece focuses only on Washington and ignores totally the fact or any possible effect of $10 billion Wall Street dollars wading into the market, as well as the plight of the farmer strapped for credit and capital.

Prices Stabilizing For Now

The Fed reports that land prices in late 2013 only gained 3%, but also touched on the farmer’s plight, indicating cash rents (and food exports) were in fact up:

Cash rents, another key indicator of farmland value, were also steady to higher as farmers negotiated contracts in the fourth quarter that will cover the 2014 season, according to the St. Louis Fed. Values were buoyed by a gain in farm incomes in the quarter, including crop insurance payments and much larger harvest supplies even at lower prices.

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In recent years, both crop and farmland prices have set records as the boom in biofuels and food exports fueled demand. But the sharp drop in second-half 2013 grain prices ahead of the record corn harvest had bankers fretting that farmland prices could also plunge.

With land acting as security on most loans to farmers for equipment, and a persistent credit crunch facing farmers quarter after quarter, signs are piling up that the value of mortgaged food-producing land is headed for a slip. When, as WSJ reports, tractor company John Deere revises its farm equipment sales projections to 5% from the 10% thought a year ago, that’s only one of a set of signals that a land boom driven by Wall Street may be coming to a close.

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