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Power Hour: The Land Bubble’s Epicenter

15:00PM Nov 22, 2013


Is there really a land bubble? "Yes, it’s located in the Upper Midwest and its epicenter is right between Worthington, Minn., and Sioux Center, Iowa," says Dave Kohl, emeritus professor of ag economics at Virginia Tech. "It will become a problem," he says. "We will over react because much of decision making is based on emotion."
Iowa led all states with the highest farmland values per acre, having a 20% increase in values this year on the heels of a 22.8% rise in 2012, with Minnesota not far behind at 17.3% in 2013. It’s not only there. Nebraska values are up 50% over the two-year span and values are 60% higher in North Dakota, Kohl said at ABA’s National Agricultural Bankers Conference in Minneapolis.
"We are in the seventh and eighth inning of the current super cycle for crops, but the third or fourth inning for livestock," Kohl says. In his view, agricultural cycles operate on what he calls a "six-year rule" on both the upside and the downside. For, example, the farm crisis in the 1980s lasted from 1981-87, and the most recent comeback has now lasted from 2007 to 2013 and is nearing its zenith, Kohl says. Because of his belief of an impending ag slowdown, he advises that farmers have one year’s worth of debt service requirements in the bank, in cash. 
 If an ag financial nightmare were to occur, a major cause would be slowdown or economic crash in emerging nations, Kohl says. "Agriculture did not feel the financial crisis of 2008-09 because of growth in developing economies." These nations, such as China, but many others, too, have been responsible for 53% of world economic growth since 1998, and have largely been responsible for agriculture’s super cycle, Kohl says.
 "Growth in these countries is moderating," he says, a concern for U.S. agriculture A slowdown in developing nations, which he predicts, would likely reduce their increases in ag imports. "The long-term viability of these nations will hinge on how they handle adversity." says.
 "If they have 3% growth, they’re in a recession." He forecasts a possible slowdown of GDP growth in developing nations to 3% to 4% compared to 1% to 2% in the developed economies. "We have the U.S. economy (because of Federal Reserve Board policy) and the world economy on steroids," he says, questioning whether it will continue. Another factor that could precipitate a slowdown in U.S. agriculture would be a rise in interest rates, he says.
Kohl notes that 270,000 farms are responsible for 60% of farm debt and 80% of production. "Debt is increasing," he adds.  One concern he has is that non-farm capital expenses have been marching higher, particularly family living. For the top one-third of producers in this category, non-farm capital expenses now average $330,000, Kohl explains.
He adds that 80% of all economics is emotional. "That’s why you get such wild market swings." Top of his list is greed. "The classic example for farmers: I just left $500,000 on the (marketing) table." Another dangerous emotion is being overly optimistic, which he thinks farmers under the age of 40 may be vulnerable to because they have only been farming during the present super cycle.

"Four-dollar corn has become a reality," he says. Another dangerous emotion: fear. "A lot of people become unable to take action out of fear of making a mistake," he says. Stubbornness, he says, is an emotion that hampers proactive action. "The classic case is a farmer who has 70,000 bushels of corn stored that has gone down in value from $7 to $4 because he can’t admit that he made a mistake."