Farmland: The next speculative financial bubble?

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From the South West Iowa News, Read More

It’s been labeled as the next, possible speculative financial “bubble.” It’s farmland. And there is no denying prices are on the rise.

In fact, according to Iowa State University Extension and Outreach, Iowa farmland value has increased 32.5 percent from 2010 to $6,708 per acre (Iowa Land Value Survey, November, 2011).

“The market appears to be holding,” Iowa State University Econ-omics Professor and Extension Farm Management Economist who conducts the annual survey Michael Duffy said. “There have been some strong sales.”

One of those strong sales includes Randy Pryor Real Estate and Auction’s Jan. 4, 32-acre tract along the Boyer River bottom. The land, with a corn sustainability rating (CSR) of 85, went for $12,500 per acre. CSR is an index that rates soil types based on their productivity for row-crop production, with an index high of 100. The price of the 85 CSR tract is one Pryor believes might be the highest in the history of Harrison County, even though it didn’t surprise him.

“Even with today’s lofty levels, there’s still a three to five percent return on farmland investments. And CD rates at the bank aren’t even at one percent, so if you have the funds, it makes more sense to have the farmland than to have money just sitting in the bank,” 35 year farmland auction veteran Pryor said. “I thought this tract of land would bring in around 10 ($10,000 per acre), and I knew there were some neighbors interested in it. It was just above the range, so it was not completely extravagant. It was a small surprise, but I wasn’t shocked.”

It’s the rate increase in 2011 and those high dollar amounts such as Pryor’s auction that has led to concerns of farmland being the next speculative bubble at the state and national levels.

“Some people feel farmers are setting themselves up for a fall similar to the 1980s,” Duffy said. “Without a doubt, it’s an interesting time and something to watch.”

One thing to watch is the gross yield per acres on that farmland. As prices per bushel increase, so will the farmland value in conjunction. For example, in 2005, corn prices averaged $1.94 per bushel in Iowa and the estimated price in November, 2011, is $6.05 per bushel. That taken into consideration, the 32 acre tract Pryor sold with the 85 CSR would be highly desirable land. Harrison County’s average CSR is 54.4.

And, according to Pryor, an auction was the only way to find out just how desirable the land is.

“Auctions have become more prevalent the past 10 years. Ninety-five percent of our land is sold by the auction method because we keep setting new highs,” Pryor said. “The only way to get top prices, is to bid for them. Think about it: Anything that is a rare commodity is auctioned whether it’s oil paintings, antiques or rare cars, because no one really knows what they’re worth. The only way to determine the value, is to let people raise their bids in a competitive manner. It’s called ‘true price discovery.’”

According to ISU Extension, it might just be the auction method that is aiding in the all-time record high value. There appears to be a rapid increase in the use of the auction method as preliminary analysis of 2011 sales data shows an increase in price by utilizing an auction. One respondent said: “Economics may get the person to the auction, but emotion often leads to the purchase.” This is a point Pryor agrees with.

“We always start the bidding low because the end value has nothing to do with the beginning. But farmland will always first attract neighbors due to the convenience. A neighboring farmer will usually set the pace as this might be a once in a lifetime opportunity for them,” Pryor said.

Just a few more reasons economists, such as Duffy, are watching the trend as a possible bubble, but even Duffy believes farmland values should remain strong for the next several months.

Duffy believes there are certain components that might affect whether the farmland values will be able to maintain their current levels such as government policies, the performance of the overall economy, the amount of debt incurred and more.

Another topic Pryor added to Duffy’s list is that of the first time buy-er.

“If you’re a first time buyer and borrowing money without assets or other land, you should take caution. But I don’t think that’s ever changed,” Pryor said. “A first time buyer, whether spending $2,000 or $10,000 per acre, will have their work cut out for them. I mean, if it was easy, everyone would do it. Farmland is always a good investment if you can handle it.”

However, it also is Pryor that is standing firm on his belief: “Farmland value is not a bubble.”

He stated two reasons:

1. The main reason it’s not a bubble is that a lot of the high priced farmland is the result of the profit in which farms have been generating. Pryor pointed to older farmers who have owned certain land for multiple years.

“There’s no place else to push to make your farm make more money,” he said. “It’s a good place to invest your profits.”

And 2. Pryor believes the farm debt percentages aren’t as high as in the past.

“Farmers aren’t as leveraged today as they were in the late 70s and early 80s,” he said. “I just don’t see an immediate crash, which is exactly what a ‘bubble’ can cause.”

Pryor’s belief is land values will correct themselves, but they won’t crash. Instead, he believes it will lead to more buying opportunities, as opposed to a crash.

“I think people that foresee a bubble will see it when the next depression comes … which I’m guessing will be around 2050,” he said, chuckling. “If you want speculation on a bubble crash, that’s just what it is: Speculation. Land gets more expensive. History shows that. We just have interesting times ahead of us in agriculture because we are now a global market when it comes to food. And I really, really believe that.”

Duffy’s outlook for potential farmland buyers is slightly more cautious.

“Carefully evaluate the individual parcel of land,” Duffy said. “Evaluate how land fits into your portfolio. Don’t buy land based on what other people are saying or doing, but has to be based on your circumstances.”

Caution might be worth heeding as nothing but time will tell where the farmland value trend will lead, only speculation: Whether it be the bubble, or Pryor’s predicted Depression of 2050.

From the South West Iowa News, Read More