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As prices for corn, soybeans and other U.S. agricultural crops soar, the cost to buy the land they are grown on is rising as well,
Farmland values in the 10th District of the central United States are climbing at their fastest rates since the 2008 boom, the Federal Reserve Bank of Kansas City said Tuesday.
Prices climbed 14.8% for irrigated cropland and rose 12.9% for non-irrigated land in seven states in the fourth quarter of 2010, compared to the same period in 2009, the bank said in a report on its Web site. The gains stand in stark contrast to the prices of homes and commercial real estate in a region where manufacturing job losses have held the economy in check.
Cropland prices rose for the fifth consecutive quarter since dropping in the third quarter of 2009, when the recession depressed wholesale prices for livestock, the Kansas City Fed's survey showed. The bank's region covers the 10th District, including western Missouri, Nebraska, Kansas, Oklahoma, Wyoming, eastern Colorado and northern New Mexico.
An auction last month in Jefferson, Iowa for a plot of 120 acres of prime cropland in Greene County drew a winning bid of $8,200 an acre – almost $1 million total. That was 44% higher than the $5,701 per-acre estimate for average values in the county as of Nov. 1, according to Iowa State University data.
"Prices continue to increase due in part to the limited supply," Randall Pope, chief executive officer of Champaign, Illinois-based Westchester Group Inc., which manages farm tracts, told Bloomberg News. "There are a number of people who would like to buy these days but there isn't a lot of product on the market."
The surge in farmland prices is directly related to soaring prices for crops.
Corn futures rose 52% last year on the Chicago Board of Trade as inventories fell when warm, dry weather stifled output in Brazil and Argentina, the biggest corn exporters after the United States.
Spot prices of wheat are roughly double what they were a year ago as global demand surged and crop failures in Russia and China threatened supplies. Other agricultural commodities on the upswing include cotton, where prices are up 155% from last year, and soybeans, which are up 50% in that same period.
High commodity prices provide farmers more money to spend on land as well as heavy equipment and seeds.
The U.S. Agriculture Department said Monday that it expects net farm income, a widely accepted gauge of the U.S. agriculture sector's profitability, to climb 19.8% this year to $94.7 billion, Bloomberg reported. The 2011 estimate is the second- highest in 35 years when adjusted for inflation, the agency said.
The latest surge in prices for farmland led Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair to issue warnings in October that a bubble could be forming.
The current situation is eerily reminiscent of 2008, when grain prices hit historic highs. Prices for irrigated farmland jumped 23.4% that year, while prices of non-irrigated farmland rose 21.2%.
Prices for grains and farmland both took a tumbled when the financial crisis and recession hit full swing. However, they resumed their upward climb in June 2010, as demand recovered.
Of course, doubts about the sustainability of the current surge in prices for farmland are starting to surface.
One troublesome bit of news came in Tuesday's report, when the Fed reported that cash rental rates for cropland across the 10th District rose only about 6% in the fourth quarter, far too little to justify such a big increase in land prices, according to The Wall Street Journal.
In reaction, some farm bankers across the region are beginning to pull in the reins on real estate loans.
"Bankers in the survey were starting to raise questions about the sustainability of farmland values" and "paying closer attention to their loan-to-value ratios," Brian Briggeman, an economist at the Omaha branch of the Kansas City Fed told The Journal.
But farmers and outside investors continue to benefit from the Fed's low interest rate policies, buying up more land and effectively putting a floor under prices.
Real estate interest rates on farms were just 5.81% in the third quarter in Iowa and parts of four other states in the third quarter — the lowest since the Federal Reserve Bank of Chicago began keeping data in 1974, The Journal reported.
Lenders usually require a 35% down payment for land purchases in the farm belt, Troy Louwagie, a land consultant with Hertz Real Estate Services Inc. in Mount Vernon, Iowa told The Journal.
"A large percentage of this land is being bought with cash," Louwagie said, as profits are re-invested in more acres.
As long as agricultural commodities don't go into a major swoon, values in Iowa — the largest corn- and soybean-growing state — may climb another 10% this year, Mike Duffy, an Iowa State University economist in Ames, told Bloomberg in a telephone interview.
"In the next year to two years, I don't see a lot right now to indicate that it's going to take a nosedive," said Duffy, who conducts the annual Iowa land survey. "What people have to remember is farmland is primarily bought by farmers and they buy it for the long term."
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