Watch Out!

Here Comes the Farm Bubble

If you're buying farmland as a short to medium-term investment, you're probably about to lose a lot of money:

Data compiled by the regional Fed banks have documented the rapid run-up in farmland prices, particularly across the Midwest’s Corn Belt. The Kansas City Fed said irrigated cropland in its district rose 30 percent during 2012, while the Chicago Fed reported a 16 percent increase.

“Investors who are seeking a positive return on their funds have shied away from bond markets,” the council said. Instead, they opted for real estate “as both a hedge against inflation and a means of achieving better than the negative real return associated with fixed-income securities.”

The land-price gains have continued even as commodity prices have softened. The S&P GSCI Agriculture Index reached a record in March 2011 and has since fallen 25 percent.

As I wrote last month, this isn't really a huge concern for actual farmers, who will be holding on to land for generations to come. It's a problem for people who see double digit increases and think they'll come for perpetuity. They won't, and we'll probably see a correction in land values quite soon.

That's fine if you're planning on keeping the land for some time. Not so much if you're speculating on the farm bubble. Just ask the geniuses who bought houses in 2006 and 2007.