What Farmland Bubble?


by Marcia Zarley Taylor, DTN Executive Editor

CHICAGO (DTN) — If U.S. farmland is in a bubble, teams of bank regulators, economists, investors and farm lenders haven’t been able to find it. Speakers at a Chicago Federal Reserve farm real estate conference Tuesday unanimously agreed that while Midwest values surged another 25{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} to 30{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} compared to year-ago levels in 2010, no one expects prices to pop anytime soon.

In fact, when Federal Deposit Insurance Corporation Chair Sheila Bair first raised the bubble question a year ago, Farm Credit Administration Chair Leland Strom took her aside at a meeting and asked, “Are you seeing something we’re not?”

Just to make sure, the FDIC, the Federal Reserve, the Farm Credit Administration and other regulators then launched an exhaustive year-long examination of farm loan portfolios and lending practices but came up with nothing to indicate that buyers are paying irrational or unsustainable prices, or that lenders were inflating values with collateral lending as they did in the 1970s. FDIC and Federal Reserve examiners are now praising rural lenders for showing so much restraint.

The grain-based farm economy is so healthy, “I can count on one hand the number of crop producers who are in trouble at this time,” said Jeff Jensen, assistant vice president of the Federal Reserve of Chicago, based in the regulator’s West Des Moines, Iowa, offices.

At Tuesday’s conference, speakers reiterated that farm mortgage firms are lending only about half the value of the properties and some even-more-conservative lenders set per acre caps on the dollar value they will finance based on returns from $4 corn, assuming that today’s lofty prices won’t last forever.

Unlike speculators in the home and commercial real estate markets, the majority of today’s buyers are farm operators and they have little intention of quick profits like those in the pre-bubble housing market. “Farmers tend to own land as part of their business, their estate and their heritage. They don’t flip properties, they hold on to it until death do us part,” said Iowa State University economist Mike Duffy.

However, Strom noted that in the third-quarter Chicago Federal Reserve land survey released this week, Midwest farmland values gains “have been almost vertical.” Iowa alone has booked 52 land sales for more than $10,000 an acre so far this year, he said, and more than half of the properties sold for more than $7,500 an acre.

Strom can’t pin down a bubble at this time, he said, “but the situation does warrant extra caution, whether you’re a farmer, an investor or a lender.” “These are unprecedented times and values.”

Using University of Illinois forecasts that the new plateau for corn prices will average about $4.60 per bushel, but range between $3 and $6.70, Purdue University Associate Professor Brent Gloy said you can understand why the recent rapid appreciation is justified. On average, “there’s lots of room to go even higher,” he said. Eventually a substantial risk to watch is how soon interest rates return to more-normal levels. Because of the sluggish economy those rates could linger for years, he added.

Perry Vieth of Ceres Partners, an Illinois investment fund that has purchased 15,500 acres and $74 million worth of land in the last four years, doubted today’s markets qualify as a bubble.

“Generally the answer is no but land is a local market. The $16,000 an acre sale we’ve all heard about in northwest Iowa is bubble-like, but it is not indicative of the whole farm environment,” he said. On this investment, properties are valued at an average of $4,700 an acre and operators paid rents from $313 to $475 an acre, so investor returns averaged 6.5{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} to 7{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} in 2011.

On one irrigated seed corn farm, yields averaged 253 bpa and contracts $6.33 per bushel this year. With the landlord’s share of 40{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} of the gross — about $650 an acre — land can easily support very attractive rents, he said.

Bruce Sherrick, an economist at the University of Illinois, stressed that higher land values will pressure cash rents to keep up, something that they have not done to date. Land selling for $10,000 an acre needs rents of $400 to keep pace with traditional investor returns, he said.


© Copyright 2011 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.

Posted with DTN Permission by Haylie Shipp


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