Here's an in-depth look at past runups in farmland values with comparisons to today worth your reading. The thoughtful analysis is written by Jason Henderson, vice president and Omaha Branch Executive, Federal Reserve Bank of Kansas City. His analysis appears in the bank's The Main Street Economist which you can access here.
He examines the runup in farmland values which occurred at the start of the 20th Century and the surge in the 1970s and the following collapses in values. "History has shown that golden ears fade and that farm corrections devolve into farm busts in highly leveraged environments," he writes. The key, is the current run-up occurring in a highly leveraged environment? Henderson's analysis shows farmers had shown restraint on adding leverage, so far.
He concludes: "While current conditions appear to be following the rhythms of the past, there is at least one distinct difference — capital investments. With rising incomes and low interest rates, farmers are making significant capital expenditures on equipment, machinery, structures and land improvements. Yet, many farmers have not used excessively high levels of debt to finance capital investments. Will checking farm debt and capital spending be enough to keep any correction in agricultural profits from spiraling into a farm bust?"
Only time will tell.
Click here for the full report.
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