Concern bubbles up over farmland values

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Auctioneer Marty Rogers of Sage Auction Solutions calls out bids while his right-hand man Denny Behr scans the room for the flick of a bid card. (Photo by Kathleen Masterson)
About the author
Reporter, Iowa Public Radio
Kathleen Masterson was a Harvest reporter, based in Ames, Iowa, from 2010 to spring 2012.
This story also appeared in The Kansas City Star.  

While the housing market languishes, another land asset is skyrocketing: farmland.

Farmland prices are up nearly 60 percent over the last decade; in many states prices have risen more than 10 percent just since last year. 

In the wake of the subprime mortgage crisis, lenders and economists are watching closely for signs of speculative buying. Federal Deposit Insurance Corp. chairman Sheila Bair in October warned of a possible bubble as “strong agricultural conditions have spurred renewed interest in farmland on the part of investors.”

But unlike the housing market, farmland investors are generally in it for the long-term, market watchers say, and they’re not betting on next year’s prices to flip their asset.  Instead, they’re counting on a steady demand for what farmland produces — food.

“It's not a luxury item, it's food, and part of our investment thesis is people are going to have to continue to eat,” said Jose Minaya, head of TIAA-CREF’s natural resources group, which recently expanded its farmland investment.

TIAA-CREF, a New York-based financial service company, oversees more than $1 billion in agriculture assets worldwide. 

“We're going to take a very long-term view. So we're not making a call of what's going to happen to farmland values in the next year or next five years,” Minaya said. “We feel pretty comfortable with the fundamentals and the prospects of this asset class from a 20, 30 year view.”

Part of the reason land prices have risen so high is the soaring costs of crops—a notoriously volatile commodity. Right now, grain is up, but not as much as land prices.

In Iowa, farmland values have risen 13 percent from last year, according to the Federal Reserve Bank of Chicago agriculture survey.  And competition for quality, well-drained farmland has been particularly fierce in this bullish market. 

A Farmland Bump

A look at the increase in average cropland value per acre over the last four years in four Midwestern states:
Source:  USDA, National Agricultural Statistics Service
Credit:   Tim Lloyd / Harvest Public Media

Consider what happened in late November in Nevada, Iowa, when 318 acres of farmland that had been family-owned for three generations went up for auction.

More than 100 people — including investors from Nebraska, Minnesota and California — packed into the auction room. The bids moved quickly and reached the astounding price of nearly $9,000 an acre, almost double the average price in Iowa last year. In the end, an investor from California dropped out and one 80-acre parcel sold to a local investor for nearly $750,000.

The high prices and the interest of outside investors have piqued the attention of the FDIC. Part of the FDIC’s job, chief economist Richard Brown said, is to look for signs that, like the housing market, things could get out of control.

“Our sense is that land prices have risen faster than the underlying fundamentals, and that’s indicative of boom,” Brown said. “But I think what would be more worrisome is if we saw an unstable debt structure under that.”

That’s the good news: Farmers and others buying land right now are cash rich, so they’re able to put money down. So far there hasn’t been the kind of crazy borrowing that led to the 1980s farm crisis.  But there are some other small signs that make economists wary. 

“We are starting to hear a few more comments that … farmers own, say, 500 acres, with no debt on it, they’re using the equity in that parcel of land to purchase another parcel,” said Jason Henderson, vice president and  Omaha Branch executive with the Federal Reserve Bank of Kansas City.  “So they're using collateral in one farm to finance the other farm.”

Henderson said there’s also talk of investors buying farmland as a hedge against inflation.

Still, there just isn’t that much farmland on the market.  Low interest rates and an unstable stock market mean many farmers will see stronger returns by holding onto their land. 

“People say, ‘hey, I’d rather own a hard asset, own some farmland than if I convert that to cash and put it in bank, what will I earn on that?” said Randy Hertz, president of Hertz Farmland Management, Inc, based in Nevada, Iowa.

Hertz has been in the business for several decades. He said he’s not worried about a bubble, not yet anyway.

“If the wheels fall off our commodity markets, which they will go down, I do not expect wheels to fall off the land market,” Hertz said. “I expect it to get quiet and slow.”