Rising Iowa farmland prices raise specter of 1980s ‘bubble’

With vivid memories of a devastating early 1980s farm crisis, federal banking officials are growing concerned that a speculative farmland price bubble may be forming.

In the early 1980s, the farm economy went through a boom-and-bust cycle. Farmers who had bought additional land when prices were soaring 30 percent annually found themselves with overwhelming debt as commodity prices fell and land prices declined.

While the average value of an acre of Iowa farmland declined in 2009 for the first time in a decade, the average price of good-quality farmland in the Midwest has risen 58 percent - adjusted for inflation - since 2000.

On Wednesday, an annual survey by Iowa State University showed the average value of an acre of good Iowa farmland rose 15.9 percent to $5,064, as of Nov. 1.

“I see the value of farmland going up and people looking to use lots of liquidity, looking for opportunities to invest their money in farmland,” said Thomas Hoenig, president of the Federal Reserve Bank of Chicago. “I see prices are rising above what the productive capacity of that land can support.”

Unlike commercial and residential land, the value of cropland in the Seventh District of the Federal Reserve Bank of Chicago, which includes Iowa, did not fall during the recent economic recession. Farmland values rose 13 percent from October 2009 to October 2010, stimulated by rising corn and soybean prices.

Corn prices are up 28 percent from last year, and soybeans are up 27 percent. At the same time, the value of the dollar has declined 12 percent since June, making U.S. farm commodities attractive to foreign buyers.

On Oct. 19, Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., sounded a warning about rising farmland prices and the potential for an 1980s-type bubble.

“Strong agricultural conditions have spurred renewed interest in farmland on the part of investors, but today's positive fundamentals are subject to change,” Bair said. “A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks.

“While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring.”

A different era

Recent farmland sales in Linn and surrounding counties have been markedly different from the emotional auctions of the early 1980s when farmers pleaded with potential buyers not to bid on their farmstead. Farmers are bidding for quality land, said Lee Vermeer, vice president of real estate operations for Farmers National Co.

“Better quality ground continues to demand very good prices, and there's a lot of potential buyers out there,” Vermeer said.

On Oct. 28, an 80-acre parcel of farmland north of Mount Vernon sold at auction for $8,000 an acre. Kirk Weih, accredited land consultant with Hertz Farm Management in Mount Vernon, said the quality of the land, with a high corn suitability rating of 84.8, attracted six bidders - evenly divided among farmers and investors.

The winning bid was submitted by a farmer owning land in Linn and Cedar counties who declined to be identified. Details of the sale had not been recorded publicly as of last week.

“Many farmers would rather buy quality farmland than pay cash rent of $300 an acre that's been going up with higher commodity prices,” Weih said. “Farmers with good yields and strong cash positions on their balance sheets have been outbidding investors for the last two or three years.”

An out-of-state investor bought 237 Benton County acres near Newhall at auction Thursday for $7,400 an acre.

Weih said a parcel of farmland in the Dysart area sold earlier this fall for more than $9,000 an acre, but the land had the potential for future commercial or residential development. That could provide a higher rate of return for the buyer and negate the impact of any decline in corn or soybean prices.

Weih said agricultural lenders have been requiring a 35 percent down payment from farmers for farmland purchases in the aftermath of the 1980s farm crisis when foreclosures soared. From a peak level of 22 percent in 1981, farm debt to equity fell to 14 percent as of last year and net farm income per acre has increased 52 percent.

Fears allayed

Mike Duffy, an Iowa State University Extension economist in farm management, is not worried about rising farmland prices being the precursor of another bubble.

“We haven't seen the debt take out against this land,” Duffy said. “The land is going into pretty strong hands. You have farm asset-to-loan value rates that are much lower than the early 1980s.

“We could debate whether farmland prices are too high, but I don't think we're seeing the formation of a speculative bubble that's going to bring everything crashing down on top of us.”

A parcel of farmland in northwest Iowa recently sold for $14,000 an acre, but Duffy attributed it to a bidding war between two farmers. “It was an exception and certainly not the rule,” he said.

Paul Kasriel, senior vice president and director of economic research with Northern Trust Co. in Chicago, said increasing demand for U.S. commodity exports should support farm commodity prices going forward.

“As the household incomes of these emerging markets rise, they're going to buy things that they always wanted but couldn't afford,” Kasriel said. “One of the things they're going to want to buy is protein. That means that the farmers in this area are going to be very busy producing protein for the rest of the world.”

Duffy said lack of alternative investment options because of low bank CD rates and a volatile stock market also is moving money into farmland purchases. Investors who own farmland and lease it to farmers can expect to make a regular return of 3 percent to 4.5 percent annually.

For the past three years, Murray Wise Associates in Clarion has marketed 17,960 acres, with 91 percent of the land, or 16,340 acres, sold to investors. Sixty-six percent of those acres were leased back to the previous owner.

John Kirkpatrick, executive vice president of Murray Wise Associates, said farmland is considered a stable asset by investors. Kirkpatrick said fears of a 1980s-type speculative farmland price bubble are overblown.

“You see bubbles with assets that don't ordinarily produce income, such as second homes and technology companies without earnings or dividends,” Kirkpatrick said. “Quality farmland has a built-in safeguard in that it produces products we will always need.”