While a lot of air has gone out of the housing bubble, there’s still a farmland bubble out there, and it could be about to burst:
(Reuters) – The steep rise in U.S. farmland prices creates the potential for agricultural credit problems if there is a sharp downturn in the sector, a leading U.S. financial regulator said on Thursday.
Farmland values doubled in the past decade, reaching a national average of $2,140 an acre in 2010. Record-high crop prices and low interest rates make farmland an attractive investment, analysts say.
Federal Reserve officials said recently they were watching to see if the land market is becoming overheated, or if a price bubble is forming.
Chairman Sheila Bair of the Federal Deposit Insurance Corp said at an FDIC forum “while we don’t see a credit problem in agriculture at this time, the steep rise in farmland prices we have seen in recent years creates the potential for an agricultural credit problem sometime down the road.”
What does a farmland bubble look like? Here’s a couple of graphs that illustrate the problem. The first comes from the USDA showing farmland prices since 1910:
The second is another interesting chart showing rural land prices in several rural counties in Texas [Brazos, Burleson, Grimes, Leon, Madison, Robertson, Washington] that is actually fairly typical of prices in rural Texas. The data goes back to 1966 and not only shows the median price in nominal terms, but the real price as well:
While prices are not as dramatic in real terms, it is clear that they are far above historical norms.
Why should the average American care? A housing bubble was worrisome because the vast majority of us live in houses, but we’ve moved away from an agrarian society. Most of us aren’t looking to buy a farm. That doesn’t mean it won’t negatively impact city dwellers:
The blood bath will be not so large as the home market collapse of the current recession. But the hue and the cry will be deafening to politicians. Taxpayers could be raped again.
Just like houses and oil, this will crash, too. The risks are not just to farmers, but also to the consumers of farm products.
This is not a sentiment that is universally accepted however. Just as there were those who said that fundamentals in housing justified the extraordinary rise in prices, there are those claim that the dramatic rise in farmland prices is justified as well:
“I don’t think they (land values) are over-valued, given current conditions,” said Brent Gloy, an agricultural economist a Purdue University. He cited strong demand for U.S. crops and low interest rates.
Joseph Glauber, the Agriculture Department’s chief economist, said comparisons to the late 1970s, when land prices soared, “seem unfounded” as farmers carry lower debt-to-asset ratios now and the farm income outlook appears strong.
Last September the Wall Street Journal published a piece that was bullish on rising farm prices and they asked, “Is farmland going to be the next gold?”
Why are they forever blowing bubbles?