A Farm Bubble?

Okay, I have to start with sports before I get to my real blog entry.  Have you ever seen such a class-less team as the Lakers?  For those of you who didn’t see it, after winning the last two NBA championships, the Lakers got swept by the Dallas Mavericks.  “Swept” is a great word, since it’s often coupled with the word “trash.”  In the last seven minutes, down 30 points, two Lakers were thrown out of the game for different flagrant fouls that could have seriously hurt Maverick players.  A third Laker was thrown out of game 2 with six seconds left for a similar loser move.  Who would have ever expected a team built around Kobe Bryant to be so classless?  (For those of you who don’t follow sports…that was sarcasm.)  Now, on to the real world…

Some analysts fear that the next bubble might be American farmland.  Last week, we saw crop prices retreat.  As a result, it’s time to start thinking about this issue.  Here are a few ideas:

farmland values have surged

1.     In parts of the Midwest, farmland values rose more than 20% last year.   See chart below (from the KC Fed).

2.     Farm values rose with booming crop values.  In addition, some farm values increased due to higher energy prices which lifted land lease revenues for oil exploration.

3.     America’s farms were valued at $2 trillion+ last year.

4.     There are 1,500 banks and thrifts that specialize in agricultural lending.

5.     According to The Economist, investors now account for 25% of all land purchases in some states.  Life insurance companies, vendor creditors and non-farm investors are active.

6.     If commodity prices fall, this land will lose value.

7.     A rise in capitalization rates (think of that as the discount rate) back to their historic norms would mean that farm prices would fall by a third. 

8. Higher interest rates have lowered farm income in the past. See Fed chart below. It makes sense that lower income would make farmland worth less.

income tend
income tend

9.     Property accounts for 90% of farmers’ wealth.

This is a much smaller issue than the house crisis, but it’s worth keeping an eye on.