Next Generation Farming

Land Bubble: Ready to Pop?

The inflow of money from coastal investors may be a sign of the top in farmland.

The sale of 15,000 acres of farmland in northwest Kansas to a group of East Coast investors has been the talk of the town lately. And no one's wasted any time getting to the big question: Is this the sign we've all been waiting for that the end is near and the farmland bubble is ready to pop?

According to the rumors, a consortium of investors from Connecticut purchased 15,000 acres of farmland in Thomas County, Kansas, for $22 million. The land will be cash rented to local farmers at around $50/acre. The investors, having noticed how farmland values have doubled in the area over the past five years, took the opportunity and diversified out of stocks and bonds.

Locals argue their investment is bad timing. The investors jumped in at the top of the market and will likely exit at the bottom.  

A lot of others seem to agree, including The Wall Street Journal editorial board. The Journal notes that while the rest of the country may be struggling to recover from the recession, the economy in America's Farm Belt region has come roaring back with land prices growing at a double-digit clip and achieving record sales.

Then they pop the question: "Is this boom rooted in genuine economic gain, or is it another Federal Reserve-induced asset bubble?"

The Journal leans toward the bubble view.

Like the housing market in the mid-2000s, the farmland market, they argue, has been artificially pumped up by an overeasy monetary policy that has diverted investment flows from "more productive purposes – say, biotechnology, telecom or new roads."

If that's the case, the investors who purchased the 15,000 acres in Thomas County weren't making a wise decision at all. Instead of investing in a strong market with a bright future for growth, they are just fools rushing in just as the party is ready to end. 

But then again, there's always the possibility The Wall Street Journal is wrong. As one CPA from Thomas County feels this is just the beginning. The cycle in land values won't correct for a long time – another 20 years, according to his estimation. 

Farmland is also held in very strong hands today, compared to the last time farmland prices suffered a major correction in the 1980s, according to another local banker.

Unlike the Farm Crisis of the 80s, farmers bought land with cash this time around instead of taking on enormous debt loads. So in the event commodity prices dip, farmland prices should remain fairly stable long term.

Who's right?

The answer, as always, probably lies somewhere in the middle.

We can argue that if farmland values are driven by net farm incomes, then a correction certainly won't happen in 2011. Farmers just have too much cash. If you need any proof of that, have a look at the balance sheet of our local farmer's co-op. Earnings in 2010 were three times their previous record. They even handed out crisp $100 bills to each shareholder who showed up for the annual meeting Wednesday. (It was a pleasant surprise. I was only hoping for a free dinner.)

USDA also says net farm income in 2010 will be 81.6 billion, up 31% from 2008 and up 26% from the 10-year average.

Faced with these facts, values are going to keep going up. But that's just what everyone said before the housing market went bust, too.

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