David Frum

04.01.13

Don't Get Too Stressed About the Farm Bubble

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Blake Hurst, writing at The American, observes the rapid increase in farm prices:

Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the last seven years. According to Federal Reserve studies, farmland prices were up 15 percent last year in the most productive part of the Corn Belt, and 26 percent in the western Corn Belt and high plains. Closer to home, a neighbor planning his estate had an appraisal done in 2010 and again in late 2012. In that two-year period, the value of his farm had doubled. According to Iowa State economist Mike Duffy, Iowa land selling for $2,275 per acre a decade ago is now at $8,700 per acre. A farm recently sold in Iowa for $21,900 per acre.

He warns that farmland has collapsed in value in recent memory:

We farmers should be more sophisticated than the average subprime borrower and more risk averse than startup investors in the 1990s. After all, we manage multi-million dollar businesses, and since the average age of farmers is near 60, most of us are survivors of the agricultural asset crash of the early 1980s. In 1981, the average price of farmland in Iowa was $2,147 per acre; by 1986, the average farm brought $787 an acre.

But here's where I think Hurst ought to include a caveat: owner-operators buying ground aren't particularly worried about a bubble in land prices, so long as commodity prices remain high enough to pay the note on the land. Even if the land was to lose, say, half its value, a buyer intending to hold the ground for the long-term would be quite alright.

After all, even cutting land values in half wouldn't be an unmanageable event, because many banks are requiring a massive downpayment on farm ground. As Lindsay Calvert observes in the Progressive Farmer:

[L]enders are increasingly requiring 50% down payments, assuming the cash flow to pay for it will come from corn prices closer to $5 than the more recent bull prices of $7 per bushel.

Perspective: much of this boom is financed directly from existing profits. Farmers are clearing record profits, and rather than directing money to the markets, they're rolling it into more ground. With corn prices so high, many of our family friends are buying a quarter section (160 acres) or more a year... in cash.

And they're wise to pursue this course, because the most finite resource in this discussion is land.

I'd recommend thinking of the latest surge in farm prices as less an asset bubble than another round of industrial consolidation. A variety of factors, primarily on the technological front, are totally reshaping the labor requirements for cereal grain agriculture. We'll soon be in an era of driverless tractors and drones, allowing fewer farmers to manage substantially more land.

The primary limitation for these future farmers will be land, not cash. This is why you see very shrewd businessmen willing to pay astronomical prices for farmland. They assume it will be a great investment in 20 or 30 years time, even if it looks iffy today.

And even if I'm totally wrong, remember something very important: the impact of a farm collapse will hit reasonably few people - thanks in no small part to the federal government's deep ties to agriculture. Between federally subsidized insurance, direct payments to producers, an ethanol mandate that drives up corn prices, and a host of other factors, big corn and big government are best of friends, so corn belt farmers can breathe easy.

I think the more pressing policy concerns are:

1) Why is the government continuing to pay direct payments to farmers when the ideal of a small family farmer will soon be a thing of the past?

2) In a future of massive farming operations, how should family farms and ranches be treated when it comes to estate taxes?

3) Water, water, water.