A Bubble Down on the Farm?

Looks as if some of the mainstream media is catching whiff of the potential for another Fed induced bubble – this time the easy money fueling speculation in farmland. The impact of ‘the financialization of everything’ is having far reaching effects. Too much money chasing too few assets, especially as the Fed sucks up so much of the supply of Treasuries, leaving money that often go there seeking another home. We have seen how this game ends – it will just be a matter of when.

Via WSJ:

• Farmers like Terry Pratt are a big reason Midwest farmland prices seem to be defying gravity—for now. Inside the tidy red-brick community center here, a hushed crowd of town merchants and growers watched as two of their own bid against each other at an auction for 50 acres of corn and soybean land.
• The auction was over in 15 minutes. Mr. Pratt’s winning bid of $7,875 an acre was nearly double the rate he paid for a nearby parcel just four years ago. “Chances are if another person bought it, it would have never sold again in my lifetime,” Mr. Pratt said.
• The big question mark hanging over the farm economy is whether a bubble is building in Midwest cropland. Prices have doubled over the past five years in states such as Nebraska and Indiana. Iowa State University reported Wednesday that the average price of an acre of farmland in Iowa, the nation’s biggest producer of corn and soybeans, reached $6,708 this year, up 32.5% from 2010 for the biggest annual increase in the history of the 70-year-old survey.
• Part of what has economists and rural bankers on edge is that Midwest farm prices are climbing at rates last seen in the go-go 1970s, the period that set the stage for the farmland bust of the 1980s, when prices sank by half. The bust ignited a rural crisis that pushed many farmers out of business and hundreds of their banks to the brink of collapse.
• “Land prices are too high. Things are getting out of whack” said Michael Swanson, an economist at banking giant Wells Fargo & Co. He figures that Midwest farmers have historically bought an acre of land for the value of corn it can produce over four years. Now, an acre of land easily fetches six years of crop production—at a time when crop prices are well above historical averages.

• The Federal Reserve issued a memo to farm bankers in late October warning that the market for cropland “may reflect overly optimistic long-term expectations” and that land values would fall if interest rates increase abruptly and farm profits shrink. (Mark’s note – gee thanks Federal Reserve. This is like the arsonist telling a homeowner her house is on fire due to matches and gasoline the arsonist brought to the scene)
• Those big returns are attracting some large investors hemmed in by the weakness of the general economy. Since 2007, TIAA-CREF, the retirement system for employees of nonprofits, has acquired 600,000 acres of cropland worth $2.5 billion, about half of which are in the U.S. “If opportunities arose, we could double our portfolio,” said Jose Minaya, TIAA-CREF’s head of natural-resources investments, who sees farmers struggling to keep up with expanding demand, keeping grain prices high for years to come.
• Sterling Liddell, an agribusiness analyst at Rabobank, said Midwest cropland prices could drop 12% to 15% sometime over the next three years to five years if interest rates climb back to more-normal levels, which would make alternative investments more attractive. (Mark’s note – chances of interest rates being allowed to return to ‘more normal’ levels in 3 to 5 years are slim to none)