Farmland Bubble? Corn Belt Expert Weighs Factors

January 7, 2013 11:00 PM
Farmland Bubble? Corn Belt Expert Weighs Factors

Shared by Steve Taff, University of Minnesota Extension economist

As farmland prices around the state of Minnesota have continued to increase over the past 20 years, it has left many farmers wondering if and when the farmland bubble may burst.

According to Steve Taff, economist with University of Minnesota Extension, farmland prices have been rising steadily since 1990, and have peaked at a state average of over $3,500 per acre in 2010. Since 1992, Taff has conducted an annual farmland appraisal in coordination with the 100-year study organized by the University of Minnesota.

"There are two ‘drivers’ for high land prices," Taff says, "high corn prices and low interest rates."

If crop prices, especially corn, remain high and interest rates on treasury bills remain low, Taff forsees the potential for land prices to continue to appreciate.

As a result of these two factors, buying high-priced land may be attractive to many people. People may view high corn prices as an incentive because of the potential for increased revenue, while low interest rates make it much easier for producers to get loans and make the payments.

"No one knows -- that’s the short answer as to whether these record farmland prices will soon drop," Taff says.

"One main issue associated with high prices is that fewer farmers possess the capital necessary to be willing to bid on land," Taff says. This has caused existing member participation in many rural communities to be lower, and makes it difficult for new farm membership to be established. "It’s very hard for young people to get started. Many banks won’t finance new, young adult farmers."

Taff noted that in the past three years these factors have contributed to there being only about one-half as much farmland sold compared to the preceding years . As a result of high prices, only one percent of Minnesota’s farmland is sold in a given year, leading to 50% of the farmland being leased. "While some land is listed, it may be pulled off the market when sellers don’t get the price they’re looking for."

With prices expected to continue to rise, Taff cautions prospective land buyers to be careful and take necessary precautions.

"Consider your financial situation, get some good advice from creditors, and think of your family. I worry that there are a few farmers out there on the verge of getting overextended when looking to finance their farm."

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Spell Check

1/8/2013 11:46 AM

  We have been buying farmland since the early 80's average about 100 acres a year. When interest rates were peaking our rule of thumb was and still is to buy land at 10 times average annual net return per acre if financed and 20 times if purchased with cash. For example if your farm has a net return of $500 per acre annually it will pay for itself over 20 years purchased at $5,000 per acre financed at 5%. We purchased some land 2 years ago and have recently sold most of it. Why? In the next 20 years will interest rates rise? Will the cost of growing grain increase? Will the profit margins stay the same? Farmers tend to have short memories. If we looked back 5 years and used the same interest rates and grain prices we would see a whole different picture in the land market today. Here we see several investors jumping into the market. But it won't take long for them to bail once they see a better return than they will get from farmland. They are hoping land appreciates but in the end someone has to buy or rent the stuff for them to capture the profit.


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