Farmland values aren't in a bubble, but prices could still tumble, says a Purdue University ag economist
Like most economists, Brent Gloy, who directs the Center for Commercial Agriculture at Purdue University, does not believe farmland values are in a bubble. But he also thinks there’s real danger values might fall, especially if the economic winds at agriculture’s back suddenly change direction.
In nominal terms, it doesn’t look like farmland prices have increased as fast as they did during the last bubble, in the 1970s. However, when you take inflation out of the equation, recent increases are "absolutely on par" with what happened in the '70s, Gloy said at the Top Producer Seminar this week in Chicago.
"We pay about 30 times cash rent for a farm today," Gloy said. "It’s never been that high. It’s high in part because people think that cash rents will keep going up, but it’s also because interest rates are low."
Gloy urged farmers to resist the temptation to buy farmland on credit, which is what led to the farmland bust of the 1980s. He also advised against buying farmland "just because everyone else is doing it." That’s the psychology that precipitated both the technology and housing busts.
Rising land values make plenty of sense given growing demand from the biofuel industry, foreign nations and growing affluence in developing countries, among other sources. "It all comes back to supply and demand," he said. "Have we seen any increases? You bet we have. Persistent demand growth can substantially increase land values and capital investment."
Land investors, particularly the institutional variety, are bullish because they believe world demand will continue to grow, and the productivity of U.S. farms will continue to improve. But he questioned whether the industry has "reached the point where we can’t keep up with demand growth through productivity enhancements."
Low interest rates are a big part of the land equation. Without today’s low interest rates, farm incomes would have to be much higher to support today’s land prices. He urged the farmers in attendance to keep a careful eye on Federal Reserve Policy. "When the fed takes us out of accommodation, pay attention," Gloy advised.
Trade policy is another major wild card. "You don’t hear as much about trade policy. But every major bust in ag has corresponded with a bust in exports," he said, recalling the grain embargo after Russia invaded Afghanistan. "Trade policy is something we forget about. Don’t lose sight of that as a farmer."
If grain demand is boosted by foreign trade, it’s supported by domestic ethanol production as well. Noting that corn demand for ethanol production may have peaked, Gloy noted that "any downward changes would not be good for farmland values."
In the final analysis, Gloy isn’t sure what force might take land values in the opposite direction. "It’s almost impossible to figure out what will take us out of the cycle," he said.
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