Farm land bubble

Jon L · Dec 18, 2012

A few days ago in south east Minnesota farm land sold for over $9000 an acre This thing shows all the signs of economics 101 sure signs of an asset bubble. Even the this time it is different syndrome. You know the new normaal or new era.

paul · Dec 18, 2012

Aboslutely.

500 acres in several parcels are up for sale right around me in a week, hope I hear creadable reports of what it goes for.

I won't be there bidding, too nuts on the price.

Heck, we can ride this bubble higher for another decade, but it will blow sometime, and welcome to the 1980's. Different, but the same.

--->Paul

JD Seller · Dec 18, 2012

Heck $9000 would be the cheap stuff down here. Farm just sold last week west of Monticello. 82 acres of 100% farm ground brought $14,500. The pasture/farm ground brought $13,500. The house and barns with a small acreage brought $9500.

The thing I think is funny is how the economist all are writing that there is no land bubble in agriculture land right now. Yeah right. The land is doing the same thing the housing market did a few years ago. It will burst. Then we will see who gets sunk this time.

ss55 · Dec 18, 2012

I saw a front page storyline in the 12-17-2012 Carroll Daily Times Herold that Iowa Senator Harkin is warning to "Beware possible land bubble". To me land prices are too high to reasonably pay off from farming it. But I thought they were too high six years ago already.

ss55 · Dec 18, 2012

Opps... Carroll Daily Times Herald.

Dick2 · Dec 18, 2012

Just like a balloon; if you keep on inflating it, it will eventually burst.

A lot of people borrow money on the inflated value - and when the bubble bursts, they end up with a negative net worth.

VADAVE · Dec 18, 2012

Gives time to save so you are ready to buy.

Spook · Dec 18, 2012

But how much is on credit? The housing bubble was driven by easy credit, no doc & flat out liar loans. Everything I read about farm land prices say that it mostly cash buyers. Or very well established buyers. My thinking, is that bubbles are credit bubbles.

Traditional Farmer · Dec 18, 2012

In terms of today's Dollar value its overpriced but those paying the top prices now are betting there is going to be a massive devaluation of the Dollar (inflation) so it'll be easy to pay off that land when what amount of Dollars today will buy a car but in the future the same amount will barely buy a Lawnmower.I think its probably as good of a bet as any as there is no indication that the Federal Reserve is going to slow down pumping Dollars into the system.Just the other day they announed they were on track to pump over a Trillion of new Dollars into the system every year.When the US Dollar collapses everyone will take a hit but those holding hard assets like
farmland,Gold,Silver etc will be affected the least while those holding Dollars,stocks,bonds etc will be hit the hardest.

Jon L · Dec 18, 2012

When I went to see my FSA loan officer for our operating loan next year he said they take calls all day long from people trying to abtain farmland financing. He did not say how many get it though.He started out of college in the middle 80's.He said this is a bubble.

Mike M · Dec 18, 2012

I wonder how much of it is being bought up with overseas money ?

NY 986 · Dec 18, 2012

You are right. The Symptoms are different than the 1980's but the outcome will be the same. There is a very strong chance if there is a new farm bill that it will be very weak in supporting commercial agriculture. The agricultural universities always figured if that happened values could be reduced by a third. As a group the older farmers who survived the lean times and built up cash on hand plus equity were the big instigators of big dollar moves in purchasing ground. As the older well heeled farmers die off (which is happening) the younger less financially secure farmers will offer bids closer to what cash flow (versus cash on hand) allows. I think any tax package passed in Washington will call for higher tax rates on top earners reducing money available to bid on land. Bad years with yields or prices will force farmers who are in a mediocre financial position to sell land which will increase the inventory for sale which will create downward pressure. A seldom talked about scenario is a local tax on wealthy citizens to make up for local budget shortcomings.

dhermesc · Dec 18, 2012

I agree it is a bubble, but the difference is there isn't near as much money borrowed against land today as there was in 1980. Back then the lenders ended up owning massive amounts of property and they sold it for what they could get driving prices even lower, prices went from bubble to depressed.

This time around the owners are much more vested and I doubt you'll see near as many foreclosures. Rather than taking the barely/nondeductable capital loss people will hold onto it waiting for land prices to come back. End result, prices may get cheaper but there will be very little land that actually sells.

mkirsch · Dec 18, 2012

Yeah, they paid too much but so what? Most of it's paid for, so they've still got the land.

All they have to do is keep farming and pass it on to the kids.

Rick Kr · Dec 18, 2012

400+ acres next to me went through the 1990s bubble here in Michigan, last sold for 12,500/acre. Guy thought he was going to build apartments and a subdivision in the middle of nowhere. He started to sue the township because they wouldnt rezone it out of Ag. Things slowed in 2004-06 then crash, my buddy bought it all for $965K (2400/acre).
Dont know if he would have won, luckily in this case the 2007 depression solved the problem.

I am looking at 2 separate 10 acre parcels, each are asking 4k/acre. Big parcels around here are now 2800-3000/acre.

Rick

NY 986 · Dec 18, 2012

Land will always be sold regardless. People age and kids nearly always have a change of heart as they close in on adulthood. Things such as death and divorce can all of a sudden put a successful operation out of business. Today's formula for success on a given farm may not hold true ten or more years into the future. Lenders will finance with land values based on an average over time. Lean times can and will return. The younger generation in nearly all instances does not have the bidding power of older well heeled farmers and the younger ones will be the ones here ten or twenty or more years in the future.

rrlund · Dec 18, 2012

The talking heads on TV deny it,but I farmed through the 70s and 80s,I know better. They claim it's not a bubble because buyers have cash. You can't convince me it's all cash sales. Lenders are lending based on equity,not on ability to repay. At least not in the long run. Just because income is high enough to make a payment this year,doesn't mean it will be next year or a few years down the road. Just a bunch of wet behind the ears lenders and investors.

Was it Denmark or the Netherlands where they just learned this lesson the hard way with a big crash in farm land prices?

jackinok · Dec 18, 2012

buying land is sort of like the stock market,you dont lose unless you sell..doesnt matter if you keep it two days or two hundred years.wish i had been smart enough in my youth to buy every acre i could lay my hands on when it was selling for $25 an acre..ive seen it go up and down many times over the years,but there is one fact that still holds true. they sure arent making any more of it. one thing you have to remember, theres a difference in building wealth,and making money. day in and day out land builds wealth,the only thing that changes is how much wealth. but it always builds. funny thing, you walk in a small town and the one always envied is the biggest landowner around. he can be literally land poor,but he has wealth. thats the difference between a lot of folks these days,one wants imediate riches so he sells his inheritance to the man building wealth. the man who sold cant wait to spend, the other calmly goes his way and uses his wealth to make more.

NY 986 · Dec 18, 2012

Not credit bubbles but the number of affluent bidders will decline in the future and along with it the bids will decline. The average age of a farmer is into his 70's so that indicates that in the next decade or so that farmer's land and equipment will come up for sale as the family in most instances has no desire to take over.
The neighborhood BTO always thought he was good to go for another 20 years but he did not even live to reach 70. There is only so much a person can do to increase their chance of living past the average life expectancy but after that it is out of a person's hands.

Dean · Dec 18, 2012

There have been plenty of asset bubbles not based upon borrowed money in the past.

Dean

MFPoor · Dec 18, 2012

When things started coming unglued in '05/'06, I bought a couple small farms that adjoin mine for roughly $.50 on the dollar. Now they're about $1.50 on the dollar. Sold one in October and have accepted an offer on second one. Time to take the money and run. Trying to beat capital gains increase/income tax increase next year. Bubble or not, this seems like as good a time as any to bow out.

tomstractorsandtoys1 · Dec 18, 2012

My banker said it is harder to borrow money for land today than ever before.With the high prices they want a large down payment and proof that it will cash flow with normal crop yeilds and prices.My bank will not lend for land on equity only cash flow.I guess they learned some lessons in the 80's.He told me they had few problems with the housing crash because they did not make loans to those who couldn't pay.They expect to see a leveling off to a small decline but not a crash.

JML755 · Dec 18, 2012

I agree that land can be a good investment but one thing to consider is property tax. I've bought land in past and sold it for what seemed like a great profit until the carrying costs (taxes) are figured in. Unlike other hard assets (gold for instance) there is an annual cost even the land is free and clear.

Agricultural land is tax-advantaged here in Michigan but you still get 2 tax bills a year. The more land you own and the more it's appraised at, the higher your tax bill. A lot of people have lost their land for non-payment of taxes.

mb58 · Dec 18, 2012

40 acres that I rent for pasture is up for sale by owner for $3000 p/a. The owner offered it to me in 2008 for $1200 p/a. I said no because I thought it was to high at that price.

dhermesc · Dec 18, 2012

That's what happened in England. They kept raising the taxes on land (because only the wealthy owned it). Eventually even the wealthy dumped their land for what little they could get out of it. The current "estates" consist of mainly the house, the farm land around them belong to other people.

I guess that's what people want to happen here.

Farm land bubble

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