The Great Farmland Bubble
From Tina LeBrun
and Wayne Schoper
South Central College
Farm land prices are at or near all-time record highs. This topic is the talk of the town whether it is in coffee shops, board rooms, on social media, or idle chitchat after church.
Many are concerned whether it is a bubble like the 1970s, or similar to the recent real estate bubble that placed the world economy in a steep recession, and nearly a depression. Dr. David Kohl is a professor at Virginia Tech and a well respected ag commentator. Following are some of his thoughts on what is happening with land prices.
The farmland bubble of the 1970s had its launch in the early to mid-1950s. This was during the second commodity super cycle of the century, which was kicked off as a result of postwar reconstruction in Japan and Europe through the Marshall Plan and infrastructure emphasis here in the U.S. This placed heavy demands on agriculture production and metals. Land values slowly appreciated through the late 1950s and early 1960s as producers were aware of the crash of the land and agricultural bubble of World War 1 and the Great Depression as a result of the first super cycle of the century.
The 1970s were a time of rapid general inflation caused by Federal Reserve chairman Arthur Burns’ opening of the money presses. Farmland was thought to be a good hedge against inflation. A new group of producers two generations away from the great depression were spurred by easy credit in agriculture. During this time debt increased from $60 billion to $220 billion in a decade, and the call to “feed the world” created increases in farmland values between 10 and 20 percent annually.
According to USDA Economic Research Service data, land values increased from an average of $219 per acre in 1972 to $823 per acre by 1982. At the peak of land values, Federal reserve Chairman Paul Volcker’s orders were to slay the dragon of inflation by raising interest rates. This, coupled with the slowing of demand domestically and globally for agriculture products, resulted in the crash. How much did land values correct? Average farmland values fell 27 percent from the peak to the trough, with 1987 nominal prices falling back to the levels of 1979. If one examines the “air out of the bubble” in inflation adjusted terms, real farmland prices declined 38 percent from the peak to the trough and 1987 prices were back to the level of 1972, 15 years before.
Fast-forward to today’s farmland market, and a very similar pattern is being established. After the farm crisis of the mid-1980s, farmland values remained stable from 1987 to 1994. Real farmland prices were at their early 1970s level, which was 20 years prior. However, starting in 1995 farmland values started to appreciate at an annual rate of 5 to 10 percent. Rapid acceleration of both farmland values and cash rents really took off starting in 2004 and quickly surpassed the peak of 1981. Consider that a producer who is currently 40 years old was only 10 years old in the last downturn. Farmland values have been rising since they were 10 years old. It becomes very difficult for young producers, lenders and agribusiness people to objectively analyze the chances of another crash.
Whether the current farmland bubble continues or corrects is a very complex issue. Factors include:
Farmland values are very sensitive to interest rates. Changes in Federal Reserve Policy or a downgrade of U.S. federal debt, raising interest rates could be challenging.
Demand from emerging nations and sustainable growth in agricultural products. I.e. food fiber and fuel are factors to be reckoned with. A slowdown, for example, in China’s economy could adversely affect the entire U.S. economy.
The slow growth of the domestic economy has lowered investor interest for stock and bonds in recent years and many investors placed money in land purchase. A change in investor psychology could take the glow off of the farmland bubble.