Farmland values may not be in a bubble, but changed fundamentals could undermine recent gains
Strong farmland appreciation, 20% or better in many Midwest markets, makes perfect theoretical sense given today’s low interest rates, strong farm incomes and high crop prices. That’s why most academics and economists generally conclude that an agricultural land bubble doesn’t exist.
"But remember, it’s not just bubbles that cause land values to come down," says Craig Dobbins, an agricultural economist at Purdue University, speaking at a recent conference. "It’s also what people perceive to be the fundamentals. And the perception of the fundamentals could change."
Dobbins was one of several speakers at last week’s Farmland Value and Leasing Conference in Decatur, Ill., who warned that unexpected shocks to ag's foundations could topple farmland values. Investors who are fueling interest in farmland could sour on it if the federal government revises its mandate that gasoline producers buy ethanol; if China’s consumption of feedstock slows; or if South America dramatically increases its grain production, among other activity.
While market conditions favor continued growth in agricultural land values, says David Oppedahl, an economist with the Federal Reserve Bank of Chicago, there's some uncertainty. Oppedeahl outlined some shocks that could disrupt the trend. A divided Congress, for instance, might be unable to find common ground on a farm bill or fail to avert the fiscal cliff. The huge federal deficit might force policymakers to trim the federal crop insurance program.
Farmland values have been increasing at double-digit rates for several years. Lee Vermeer, vice president of real estate operations for Farmers National, expects the growth to slow this year. Vermeer sold about 700 farms last year worth about $500 million, and most of the sales happened at auction. Farmers National also manages 5,000 farms.
"When you see land values doing up 30% a year in some states, year after year, you think to yourself, That can’t go on."
But it has. Farmers National, which witnessed a 20% to 25% rise in values last year, expects to see increases north of 20% again this year. Interest has picked up of late. Investors are clamoring to get in on deals before the end of the year when tax rates and policies might change.
"In every area where we work, 24 states, there’s a record demand for land. We have record rents, record income, record land values," says Vermeer, noting that investors remain bullish on agricultural land, even though profits have gone up 30% since 2007, according to USDA statistics.
But Vermeer, too, worries that the sands could shift under the agricultural economy. "If they take away that (ethanol) mandate, there goes a chunk of our demand. That’s something we have to watch."
Agricultural land, like stocks, bonds or other investments, may be due for a "market correction" says Vermeer, noting that recent yearly price increases rival those of the late 1970s. They were followed by a fall in land vaules in the early 1980s that triggered a farm crisis in the Midwest. "The likelihood of a correction goes up with increased volatility," he says.
Dobbins, who does a survey of Indiana farmland values every year, used to have trouble explaining the steady increases since 2000. It's no longer as difficult, given recent trends in net income, returns and crop prices. There’s also the matter of supply constraints. "There’s never enough land brought to the market, it seems," he says.