Is Farmland on the Bubble?

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Back in 2004, my wife and I were seriously looking into buying a condo at the beach in Alabama. We’d waited several years before making this decision, thinking that these condos couldn’t possibly continue to increase in value like they had been. At some point, prices would drop a little bit, and that would be the time to buy. But for nearly a decade, we watched as prices continued to rise. We were within a few thousand dollars once of having an offer accepted on a unit, but we walked away when neither party would give any further. My wife jokes that I was too stubborn to go any higher, but in all actuality, something just didn’t feel quite right. I just didn’t see how these increasingly high prices could possibly be justified.

Within a few short years, the market crashed, and those same condos are selling (if they sell) for almost half of what they were then. Whew…

As I think about that experience, I can’t help but wonder, after watching farmland in the U.S. increase in value for two decades, if the same isn’t bound to happen. Are farm prices on the bubble, so to speak?

Just as we were doing when we were looking at condos several years ago, money follows a pack. We had seen others’ successful investments, and we wanted in. That bubble can’t maintain that much growth, that quickly. At some point, it has to pop.

I was just having this discussion with an ag lender a few weeks ago, when I mentioned to him that I had seen farmland in Kentucky renting for $250/acre. That number astounded me. Perhaps showing my, ahem, “experience”, I told him I remembered when it rented for $30. He stated some ag lenders are requiring larger down payments because of those lenders’ concern over high land prices.

I also shared that with an auctioneer friend of mine in Illinois recently when he said, “That’s nothing.” He’s seen farm land renting for as high as $511/acre in Illinois and sales prices of $10,000-11,000 per acre.

With ag land appreciation, prices and rent like that, who wouldn’t want to own their own farm land? But the prices have risen steadily since the farm crisis back in the 1980s, and it’s even risen 25% in the last year. Since we’ve entered this recession, farmland is the only form of real estate that is still rising in price.

Back in the late 1980’s we sold thousands of farms because of the crash. With commodities prices and ethanol, are the economics different today or should we anticipate another crash in the ag market? I’d love to hear your thoughts.

UPDATE: Since this post, Reuters has written more extensive story on the same topic. You can read that here if you’re curious to read more on the topic: http://goo.gl/jZQOQ

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~ by Craig King on December 8, 2011.

One Response to “Is Farmland on the Bubble?”

  1. I would think that you are correct in a farming bubble for a number of reasons. First, with the economy in shambles, farm subsidies will be one of the first things cut because it won’t cause a riot in Harlem. Farm subsidies in a bad year represent the majority for the farmers you are referring to in Ky who are renting rowcrop land for #250 an acre. Second, China is fragile and its economy is shrinking. This will likely result in fewer grain imports. Third, the cost of fuel and equipment is astounding for farmers. The bubble is close to bursting and any factor will burst it. J

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