Henderson: Are We in a Farmland Bubble?

February 22, 2013 09:05 AM

Attendees of the Grain & Oilseeds luncheon at USDA's Ag Outlook Forum heard Jason Henderson, vice president and branch executive at the Federal Reserve Bank of Kansas City, deliver a presentation on the red-hot topic of rising land values -- specifically, whether farm land prices are too high.

Henderson began by saying that in the past, drivers of farmland booms and busts have been demand and supply shocks as well as interest rate shocks, taking attendees through the rise and fall of farmland values in Nebraska and Iowa over the past century. The current boom in farm land value can be chalked up to low interest rates and booming farm income, according to Henderson

As to whether we are currently in a land bubble, Henderson said whether land prices are at "rational" levels is a matter of relativity that depends upon what your expectations are for farm income from farm production going forward.

Henderson said another way of analyzing the state of land values is to compare cash rent relative to land prices. He says the spread is currently quite high, and that this will likely need to be narrowed either via higher cash rents or lower land values going forward. He noted that with expectations for lower prices for most crops going forward, land prices coming down may be the more likely scenario.

Henderson also explained that the "wealth effect" is prominent in agriculture, in that when wealth is high and interest rates are low, farm capital investments remain strong, but farm leverage increases as farmers use debt rather than income to finance investments. For this reason, Henderson noted that the possibility of rising interest rates is concerning, especially amid mounting whispers that the FOMC may scale back some of its quantitative easing measures.

Key, Henderson noted, is whether farmers will resist the temptation of low interest rates and high land values and not leverage the farm.

Another concern, according to Henderson, is that while farm sector debt remains low, it is concentrated, signaling this is not something that should be brushed off as a non-concern.

In the question and answer segment following his presentation, Henderson fielded a number of questions regarding non-farm investors and their effect on land values. While Henderson said they are certainly present at land sales, they are typically not the winner of such auctions. Farmers are still the primary buyers of farmland, especially at auctions. Heirs are the primary sellers of farmland, according to Henderson.

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