Farmland prices appear to be entering an economic bubble that could end in a rapid price decline as happened in the 1980s. A dozen agricultural economic experts discussed the possibility at the 2012 Breimyer Seminar sponsored by the College of Agriculture, Food and Natural Resources (CAFNR) and University Extension at the University of Missouri.

Ron Plain, the D. Howard Doane Professor of Agricultural and Applied Economics at CAFNR, said land values have recently increased at a rate noticeably higher than the traditional norm.  Such increases have occurred only twice in the 20th Century, each resulting in a price bubble and resulting crash.   The first bubble occurred in the 1920s that later saw the value of farmland drop 65 percent.  The second bubble occurred in the late 1970s and into the early 1980s.  After that, farmland prices dropped 39 percent, triggering what was called the Midwest Farm Crisis.

Missouri farmland prices are exceeding $4,000 per acre in some areas, an increase from $600 per acre in 1986.  Plain said prices are rising because of inflation, low interest rates, farmers expanding their operations, productivity increases and declining farm acreage.

Ron Plain, the D. Howard Doane Professor of Agricultural and Applied Economics at CAFNR.

The annual seminar brings together experts to discuss important issues facing agriculture.  The seminars were started by Harold Breimyer in the 1970s.  He taught agricultural economics at MU after a career at the USDA.  Tough topics facing agriculture and bold and diverse solutions were his specialty.   Seminars were named after him and his philosophy.  After Breimyer died in 2001, an endowment was secured to continue the discussions.  It attracts speakers from across the country to identify problems and pose solutions.

Low Interest Rates and Strong Commodity Prices

William Edwards, Iowa State University Extension Economist, quoted an Iowa Realtors Land Institute Survey that showed an increase of 10.8 percent in that state’s farmland prices in just six months – from Sept. 2011 to March 2012.  His state was the first to see a $20,000 per acre sale price – up from the previous record of $16,750 per acre.

Edwards said 74 percent of the state’s land purchasers were other farmers and 22 were investors.  Just three percent were new farmers.

Peter Klein, associate professor of applied social sciences at MU and the director of the McQuinn Center for Entrepreneurial Leadership, said historically low borrowing interest rates are helping fuel current purchases.  While these rates are expected to continue in the short term, there are no guarantees that these will continue beyond next year.  Federal Reserve Chairman Ben Bernanke estimated that low borrowing rates will continue through 2014.  Interest rate uncertainly after that, and the prospects of inflation, is causing many buyers to pull the trigger now.

Peter Klein, director of the McQuinn Center for Entrepreneurial Leadership.

Part of the attractiveness of land comes from increasing commodity prices of the last few years.  Joe Horner, extension associate professor of agricultural economics at MU, said corn and soybean crops in Missouri have increased each of the last five years and are now approaching $4.5 billion in annual impact.  Farmers are willing to pay more for land when commodity prices are high.

Pat Westhoff, professor and director of the Food and Agricultural Policy Research Institute (FAPRI) within CAFNR, said global demand is supporting this optimism.

Pat Westhoff, director of the Food and Agricultural Policy Research Institute.

Westhoff pointed to Asian economic growth and changing diets, and emerging bio energy markets. China is the number one importer of U.S. agricultural products.  Global food demand could double by 2050.

Such boosts in crop futures is triggering investors from outside of the farm sector to look at buying ground, said Chris Boessen, CAFNR teaching assistant professor in agricultural and applied economics.

Chris Boessen, CAFNR teaching assistant professor.

Institutional investors are wary of volatile gold and stocks, and are disappointed with the low return on bonds. Farmland, on the other hand, has yielded a solid 10.6 percent in sale price between 1970 and 2010, he said.  This compares to stocks returning 10 percent, commercial real estate returning 8.7 percent and bonds yielding 8.2 percent, during the same period.

Farmland, Boessen noted, also tends to historically increase in value with inflation, making it a safer investment.

Ray Massey, MU extension professor in agricultural and applied economics.

Time to Jump In?  Not So Fast

So is it time to buy early and heavy in farmland and get rich?  Think twice said one economist.

Using a cold and analytical spreadsheet, Ray Massey, extension professor in agricultural and applied economics, encourages potential investors to remember that all booms eventually end and the value of anything returns to its inherent intrinsic value.  He said the decision to buy land now shouldn’t be influenced by the euphoria of present profits, but rather analyzing it as any business venture.