Will there be a farmland bubble?

The “gold” in “good as gold” could as well be Iowa farmland.

While the price of gold has more than doubled in the past five years, so has the price of Iowa farmland.

The difference, according to astute investor Warren Buffett, is that farmland yields an annual return - a quite substantial return in recent years - while gold, apart from its potential for appreciating in value, is good for little more than admiring and fondling.

Last year's 32.5 percent increase in Iowa farmland values has prompted concerns that farmland may be the next speculative bubble. But most veteran observers think not.

“I just don't see it as a bubble set to burst,” said Iowa State University economist Mike Duffy, who coordinates ISU's annual land value survey.

The value of Iowa farmland - which has increased from $3,204 per acre in 2006 to to $6,708 in 2011, according to the ISU survey - is pegged closely to commodity prices, said Duffy, who believes that the forces driving recent high grain prices will persist.

Most observers believe the current rates of increase in farmland values cannot be sustained. But Duffy said a leveling off is more likely than a dramatic deflation.

Neil Harl, emeritus professor of economics at ISU, agreed that a plateauing of land prices is the most likely scenario.

So does Jason Smith of Mondamin in western Iowa, an auctioneer of farm and ranch real estate: “We are going to level off to an annual rate of increase in the 5 percent to 6 percent range,” he said.

Smith, who writes about the farmland boom on his website, www.dreamdirt.com, said he is bullish on farmland for two reasons: It's finite and world population is not.

“There is a close correlation between recent world population increases and increases in the value of farmland and the food it produces,” he said.

Smith said the fundamentals supporting today's ag land prices are the opposite of those that prevailed in the mid-1980s when farmland values collapsed and many farmers either sought or were forced into bankruptcy.

Interest rates are extremely low today versus extremely high then, and purchasers of farmland are assuming much less debt than they typically did in the 1980s, he said.

THE BUBBLE OF THE 1980s

ISU's Harl, a childhood survivor of the mid-1930s farm crisis and a leading authority on the mid-1980s farm crisis, said speculation brought down many of the farmers who went bankrupt in the 1980s.

“People who could not afford the risk borrowed heavily at high interest rates and got burned when land prices fell,” he said.

One-third of the farmers owned two-thirds of the debt before the bursting of the agland bubble in the 1980s, he said.

So far, during the current run-up in farmland values, “people are gambling with their own money,” said Harl, who recalls overhearing his dad tell his mother in the fall of 1936 - after their drought-stricken corn crop yielded 15 bushels per acre - that they had $100 to carry the family through the winter and to buy seed for the next year's crop.

The farm economy is infinitely better today, said Harl, who sold corn for $7.06 a bushel on June 28.

“Nobody is speculating today. Buyers know the numbers. They know what they are doing,” noted Mark Gannon of Gannon Real Estate and Consulting in Ames.

“Farmers learned from the '80s. They understand that they can't over-leverage themselves. It's a very fresh memory,” said Kyle Hansen, a land consultant and realtor with Hertz Real Estate Service in Nevada, Iowa.

Gannon said he has not seen a recent Iowa farm buyer borrow more than 60 percent of the purchase price.

About 75 percent of the farms sold in Iowa are bought by active farmers, with investors accounting for the rest, according to Hansen and Gannon.

Sellers, they said, are most often retiring farmers or heirs settling estates.

“You only get rich when you sell, and farmers buy land to farm it, not to sell it,” Duffy said.

Hansen said it's hard to assign a value to farmland right now.

“You get a few neighbors with strong balance sheets and a strong desire for more land, and you get a lot of competition,” he said.

Experts consulted for this article said the highest-priced ag land they know of was a Sioux County farm that recently sold for $20,000 per acre.