As corn prices decline, bankers and agricultural economists are predicting a slowdown in farmland prices that could turn into a bust.
Din Tai Fung, a restaurant in Shanghai’s Xintiandi district, is famous for its steamed pork dumplings. The pigs that keep those dumplings on the table are fattened with corn—much of it imported from the U.S.
American farmers have prospered during a three-year boom in corn and cropland prices. As values have soared since 2011, farmers bought more acres and upgraded their harvesters to produce a record corn crop of almost 14 billion bushels in 2013.
Nothing better shows the fertile times than investment in farm equipment. Sales of self-propelled combines, including an $850,000 John Deere model with iPod system, navigational equipment and heated seats and an attachment that harvests the corn, jumped 40% in November.
Now, as corn prices start to decline, bankers and agricultural economists are predicting a slowdown in farmland prices that could turn into a bust.
"I can see the fear in farmers’ eyes when they think of all the moving pieces around the world gutting the value of next year’s crop," said David Kohl, an agricultural economist and president of consulting firm AgriVisions, who last week spoke at several farming conferences in northern Nebraska. "Most of them know the boom in corn prices and farmland prices is coming to a screeching halt."
U.S. farmers, whose earnings grew an average 6 percent in 2013, face several challenges: a likely reduction in corn exports to China after a record year; greater competition from other nations; moves in the U.S. and the European Union to limit the use of ethanol, a biofuel made from corn; and a possible record in production of the crop in 2014.
Kohl said a plunge in land prices would strip value from farms and put over-leveraged farmers out of business. Farmland prices are up 72% to about $8,000 an acre in the last three years, according to data from USDA. In Iowa, the largest producer of corn, the gain was 90%, according to the Iowa State University in Ames.
The value of the nation’s $2.5 trillion of farmland may tumble by as much as 30% in the next three years as the corn rush ends, according to Gary Ash, chief executive officer for 1st Farm Credit Services in Normal, Illinois.
"The increase in land prices was caused by the increase in corn prices," Ash said. "The reverse is going to be true. The drop in corn is going to result in a drop in land value."
In the 1980s—the last time an agricultural land-price bubble burst—thousands of families lost their properties. Farmers who bought additional land when prices were surging were caught with too much debt as commodity prices fell.
Farmland prices tumbled 27% in the four years following a 1982 peak, according to USDA data. In some areas of the Midwest’s grain belt, losses were more than 50%.
Stephen Riebel, a loan officer at Bank of Colby in Colby, Kan., said he still has nightmares about those days. As a young banker, he visited deeply indebted farmers who were his friends and neighbors to hand them eviction notices after a collapse in corn prices.
"All it takes is for everyone in the world to have a good crop next year and land prices will drop like a rock," Riebel said from his office in northwest Kansas. "I’ve seen the heartache that leads to."
Bankers have learned their lesson, said Timothy Buzby, CEO of agricultural financier Farmer Mac in Washington. Most banks won’t give mortgages to properties that don’t have at least 30% equity—the amount needed to protect them if there is a decline in land values, he said.
"If there is a correction in land prices, farmers would hear a resounding ‘I told you so’ from most bankers," said Buzby. "We haven’t seen many people go out on a limb to finance unwise land purchases."
Farmer Mac sells debt to buy eligible farm and rural utility loans and makes money on the spread between the sale price of the debt and income from loans it purchases. Farm debt rose 10% to $310.2 billion this year, according to the USDA.
Some farmers expect a soft landing. Martin Barbre, who owns a 5,500-acre farm in Carmi, Ill., has been growing crops for more than three decades. Corn accounts for about 50% of his production. He bought about 250 acres of land in the last three years and said prices will likely plateau.
"I think we’re going to see corn prices stabilize, and we’ll have either level land prices or a slight drop," Barbre said. "I’m not looking to see a large price crash like in the '80s. Absolutely not."
Barbre said ripples in agriculture, which accounts for about 5 percent of gross domestic product, will affect the wider economy. "The rural economy has been one of the bright spots of the recovery, and to lose that would have a wide impact," he said.
Corn is America’s biggest cash crop, reaping $63.9 billion in 2011, according to the USDA. Soybeans are next, at $37.6 billion, followed by wheat, at $14.6 billion.
The U.S. accounts for one-third of the global corn harvests. About 95 million acres are used for corn in the U.S., almost a third of cultivated farmland, according to the National Corn Growers Association in St. Louis, Mo. The land devoted to corn equals the size of New York, New Jersey, Connecticut and most of the remaining eastern seaboard.
At the Chicago Board of Trade, where commodities are bought and sold, investors are shunning corn after the three-year run- up in prices. The crop rose to 2013 high of $8 a bu. in July before tumbling to a three-year low of $4.10 earlier this month. Global demand for the grain had dropped 35 percent from an all- time high in May, according to a USDA index.
Prices for corn probably will continue to decline for at least the next two months, according to Jeffrey Zhang, head of Asia research at Trading Central Asia Ltd. in Hong Kong.
Hedge fund managers and other speculators are betting the losing streak is far from finished. Short positions, or trades that make money when prices fall, outnumbered long bets by almost 100,000 contracts in December’s first week, according to the U.S. Commodity Futures Trading Commission in Washington.
China, which buys almost 15% of American corn exports a year, is stepping up imports from U.S. competitors such as Argentina, Ukraine and Thailand. China’s corn imports add to its own harvest, which hit a record this year. China has turned away more than four shipments of American corn in the last two months because they failed to pass purity tests.
The Environmental Protection Agency proposed last month cutting the amount of ethanol that refiners are required to blend with gasoline by 9.7% next year from the targets set in 2007. The petroleum industry says the targets are excessive. Ethanol advocates say such a move would hurt American farmers as well as increase greenhouse gas emissions.
Some farmers are still spending like the boom times are far from over. The November increase in combine sales was the biggest in two years.
Agricultural machinery producers’ earnings rose 31% in the third quarter. Moline, Ill.-based Deere & Co., the world’s largest maker of farming equipment, posted third-quarter profit that exceeded analyst consensus by 10%.
"You’re always going to have bad farmers who make bad decisions, just like any profession, but we’ve found for the most part farmers are cautious by nature," Farmer Mac’s Buzby said. "It’s been a good decade for agriculture, and there have been farmers overspending on toys, but most of them will try to limit debt."
As the corn era winds down, the top one-third of farmers will continue to do well, the economist Kohl said. Those that used their cash to buy helicopters and lake houses will suffer the most.
"We’re seeing an end of a corn super-cycle that brought wealth and prosperity to much of rural America," Kohl said.