Farmland Prices Grow Higher, Regulators Worried About Another Bubble

Fri, 2011-03-04 09:00

Are you thinking of selling or buying farmland? In the last ten years farmland values have doubled on average. Wish we could "still say the same" for our home prices. Will farmland prices drop like home prices? Hmmm.

During the last decade commodity prices have doubled and the banks have had favorable lending terms and low interest rates. These favorable conditions have helped increase farmland prices. Looks like that may be changing soon.

"Don't Bet the Farm: Assessing the Boom in U.S. Farmland Prices"* is the title of a symposium hosted by the FDIC. The regulators are worried about another bubble in farmland prices. In the early 1980's, farmland prices dropped almost 50% (see chart). Many banks were hurt by bad loans and the regulators, FDIC, had to take over the failed banks.

The last farmland bubble happened in part, due to the high interest rates in the 1980's.  FDIC is worried about the effect rising interest rates would have on future farmland values. This could lead to bad loans and more trouble for bankers, hence the reason for the symposium.

Three things we know about farmland from the chart on the right;

1.  The total acreage used for farming (green line) has been declining since in 1970. No surprise there.

2.  Take a look at the red line in 1980, you can see the brutal bursting of the farmland bubble. Times were tough then, for example gas hit $1.00 a gallon, we had the Iranian hostage crisis, inflation was approaching 15% and one more item, we had just completed the Chrysler bailout. Hmmm.

3.  Now look at the red line for 2009 and you will see that farmland prices are now higher than they were in 1980. It's easy to see why the bankers are getting nervous.

Demand has been high for farmland. Some people even claim it is less volatile than the economic woes facing our country.

Just to set the record straight, farming is risky. It's always been risky. You must deal with the uncertainty of the weather, commodity prices and of course legislative risk from Congress.

Feb 25, 2011  Stephen Rimmer, Certified Financial Planner™,  All rights reserved.

Any opinions are thos of Stephen Rimmer, CFP® and not necessarily thos of RJFS or Raymond James. Expressions of opinions are as of this date, March 7, 2011, and are subject to change without notice.

Wall Street Journal, online Farmland Alarm 2-18-11

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