Are Farmland Prices Ready To Burst?
Fears that farmland prices are peaking in a bubble that could burst are becoming more widespread. If this happens, the agricultural community could suffer much as many people did after the recent housing-market implosion. It could significantly damage farmers, food production, certain banks, and bond holders who are the sole source of capital for some banks.
The current land price rise began in about 1995 and ramped up even more in 2004. Inflation-adjusted farmland prices are now about 15% higher than they were during the last price bubble in about 1983, and about 2.5 times higher than the other price bubble in the past century, in about 1915. Each of those was followed by a price decline of more than 40%.
- "Emerging Risks: Farmland Price Bubble," Federal Deposit Insurance Corporation slide show, January 2011. Media Contact: David Barr, 202-898-6992.
One of the factors leading to the current peak is the skyrocketing prices that crops such as corn, soybeans, and wheat are fetching. Among the states that have such crops and are of most concern are IA, IL, IN, KS, MN, and NE. But these crops are grown in many other states, so if widespread land price increases are also occurring there, damage from a bursting bubble could affect farms in about two-thirds of the states. Those that are producing all three crops include DE, IL, KS, KY, LA, MI, MO, NC, ND, NE, NY, OH, PA, SC, SD, and TN. States that are producing two of the crops include AR, AZ, CA, CO, IA, ID, IN, MS, MT, OK, OR, TX, UT, WA, WI, and WY. States with one of the crops include MD and NJ.
Sorghum, barley, and oat prices are getting caught up in the same forces driving the corn price increase, says Bob Young, chief economist for the American Farm Bureau Federation (202-406-3620). Cotton and peanut prices appear to be on track to mimic the pattern for corn, soybeans, and wheat, he says. States that produce these five crops overlap almost entirely with those listed above, but the magnitude of the effect on land prices could be greater with the higher number of crops involved in any given area.
For locations of these and other crops, see:
Many other factors are contributing, to various degrees nationally and locally, to the current farmland price peak, including US and global crop demand for food and fuel, rising oil prices, low interest rates, the value of the dollar, inflation fears, the previous run-up in land prices due to the housing bubble, the continuing availability of low-collateral loans, the participation of speculators, population growth, and international political instability. The Farm Bureau's Young says one of the most important factors to watch is interest rates, since an increase of just 1% could begin to have major effects.
For more background on these forces, and concerns about their impacts on farmland prices and agricultural communities, see:
- "Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks?" FDIC Quarterly, Vol. 2, No. 4 (2008).
- USDA Economic Research Service: "Farm Sector Assets, Debt, and Equity Forecast to Increase in 2011F"; Mary Reardon.
There are numerous ways to get a handle on what is happening in the areas of interest to your audience.
A starting point for national and regional perspectives is an Oct. 1, 2010, report by the Federal Reserve, based on data for commercial banks from the first and second quarters of 2010. These banks hold about 37% of the nation's farm real estate debt and 51% of the production debt. The report contains a wealth of data on current indicators and selected trends, and reflects major differences around the country.
To contact your Federal Reserve district to get more localized details, see:
One of the important highlights is data on the failure of banks that emphasize agricultural loans. In 2009, there were more such failures (9) than any year since 1990 (17), and in the first quarter of 2010 there were more failures (3) than any first quarter since 1989 (5).
Some of these failures are due to excessive loan-to-asset ratios, inadequate liquid assets, and an already-stressed financial situation due to the failure of non-farm loans made by the banks. However, one redeeming factor at the moment is that some banks are evaluating loans based more on projected cash flow than land value, so that may help if crop prices and demand stay high (though a parallel assumption made during the housing price run-up proved to be a critical flaw).
For any geographic area of interest, you can get more insights by looking at land prices tracked by the USDA's National Agricultural Statistics Service. You can compare data for 2002 -- prior to the most significant recent surge -- to that for 2007, several years after the surge took root.
- Quick Stats (select census; economics; farms, land and assets; ag land; asset value; measured in $/acre; and the geographic area of interest, such as zip code, county, state, or region). Media contact: Stephanie Chan, 202-720-5555, cell 202-256-8626.
Another source of information is an organization called Farm Credit, created by Congress in 1916 to provide capital to the agricultural community. Farm Credit lending institutions hold about 43% of the nation's farm real estate debt and 36% of the production debt. The organization isn't providing public data analogous to that published by the Federal Reserve, but you can interview local representatives to quiz them about their experiences, observations, and data.
For more local detail, you'll need to go to the county clerk and recorder or assessor to get recent land values.
For additional perspective on this issue — including possible solutions that might be based on lessons learned from the housing bubble such as more rigorous oversight of lenders and borrowers — you can contact one or more of the experts who were featured in a March 10, 2011, symposium hosted by FDIC.
- "Don't Bet the Farm: Assessing the Boom in U.S. Farmland Prices," symposium hosted by Federal Deposit Insurance Corporation, March 10, 2011.
For one example of media coverage, see:
- "In Price of Farmland, Echoes of Another Boom," New York Times, March 3, 2011, by William Neuman.