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Published February 01, 2011, 09:30 AM

Will ag boom go bust?

Marlow Nelson, a Powers Lake, N.D., farmer, remembers the mid-1970s and what it brought for agriculture: Rising grain prices, soaring land values and the widespread belief that the Northern Plains would enjoy extended agricultural prosperity.

By: Jonathan Knutson, Agweek

Marlow Nelson, a Powers Lake, N.D., farmer, remembers the mid-1970s and what it brought for agriculture:

Rising grain prices, soaring land values and the widespread belief that the Northern Plains would enjoy extended agricultural prosperity.

He also remembers what came next — declining prices, crippling debt and an ag boom gone bust.

The 64-year-old Nelson looks at what’s going on in agriculture today and sees similarities between then and now.

But he doubts the current ag boom will end like the 1970s version. North Dakota and Minnesota both lost about 8,000 farms between 1975 and 1985.

“I don’t think it’s going to happen again.” he says.

Others in agriculture have noticed the similarities, too.

“It’s something I’ve thought about,” Richard Strom, executive vice president of Minnesota-South Dakota Equipment Dealers Association in Owatonna, Minn., says of a possible repeat of the 1970s-era bust.

But Strom, a 40-year ag veteran, thinks there are good and strong reasons why the Northern Plains won’t see another bust.

It’s different this time, he and others in ag say. Despite the similarities between then and now, there are important differences, too,

“I don’t know if things are as much alike as a guy might think,” says Dennis Biliske, with Biliske & Merrill Land Sales and Biliske & Schuster Auctioneers in Grand Forks, N.D.

Yes, grain prices and profits have shot higher. Yes, land prices and expenses have skyrocketed.

This time, though, interest rates are much lower and much less borrowed money is being used to buy land.

“There’s a lot less leveraging now,” says Brent Qualey, a West Fargo, N.D.-based appraiser for Alerus Agriculture in Grand Forks.

Farmland now is being purchased primarily with cash rather than borrowed money, which often was the case in the 1970s, Qualey and others say.

When the 1970s ag boom went bust, some farmers were unable to make land payments and ended up losing the land.

Now, at worst, land buyers “might not get the level of returns they hoped for, but at least they’ll still own the land,” says Andrew Swenson, farm and family resource management specialist at the North Dakota State University Extension Service in Fargo.

The regional trend also seems to hold true nationally.

Though soaring U.S. farmland values require “close monitoring,” the prices don’t appear to involve excessive levering or inappropriate loan products from the nation’s 1,579 farm banks, Sheila Blair, chairwoman of the Federal Deposit Insurance Corp., said late last year.

Crop prices soar

The Northern Plains generally enjoyed both good crops and high prices in 2007 and 2008. That combination put billions of additional dollars into farmers’ wallets.

South Dakota farmers alone enjoyed crop cash receipts of $5.36 billion in 2008, a whopping $3.2 billion more than in 2006.

Though yields mostly were good in the region in 2009, prices slumped through the year.

This year, yields were good again, with prices rallying sharply in mid-summer after news of widespread drought in Russia. South Dakota farmers, for instance, received an average of $4.75 per bushel for corn in December 2010, compared with an average of $3.33 per bushel in December 2009. By mid-January of this year, corn was fetching upward of $6 per bushel at many elevators across the state.

Prices shot higher 35 years ago, too.

Average U.S. wheat prices stood at $1.34 per bushel in the 1971 to ’72 marketing year before rising to $1.76 per bushel in 1972 to ’73. They shot to $3.95 in 1973 to ’74 and $4.09 in 1974 to ’1975, subsequently tumbling sharply, according to U.S. Department of Agriculture figures.

It took two decades to get back to the 1974 to ’75 level, with average U.S. wheat prices reaching $4.55 in 1995 to ’96

Now, wheat prices are skyrocketing again, despite a temporary retreat in 2009.

For spring wheat, the most common variety on the Northern Plains, the average price per bushel rose from $3.70 per bushel in the 2005 to ’06 marketing year to $7.39 in 2008 to ’09. The average price fell to $5.26 in the 2009 to ’10 marketing year, but will rise sharply in the 2010 to ’11 marketing year.

Expenses, land prices rise

What farmers nationwide paid for such things as seed, fuel, land rent and interest expenses on average rose 50 percent from 1977 to 1981, in part because of much higher spending on interest expense, according to USDA numbers.

Expenses and land rents are rising again, though Nelson notes that land rents represent a smaller share of overall expenses today than they did 35 years.

Nationally, expenses have risen 8 percent in the past year and about 30 percent in the past four years.

Average rental rates for North Dakota cropland rose about 19 percent from 2006 to 2010 and continue to increase this winter.

Land prices are rising faster than rental rates.

In North Dakota’s Cass County, in the heart of the rich Red River Valley, farmland rented for an average of $57.30 per acre in 2006 and $81.80 in 2010, an increase of 43 percent, according to figures from the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture.

In the same period, the average value of rented farmland in Cass County rose from $1,225 per acre to $2,092, an increase of 70 percent.

Interest rates, investments

Today’s lower interest rates make a huge difference, ag officials say.

Even if someone is buying farmland primarily with borrowed money, monthly payments and interest costs are far lower than they there were 30 years ago.

Say that a producer borrows $100,000 to buy farmland and promises to repay the money over 15 years.

With an interest rate of 15 percent, the monthly payment is roughly $1,400, with $1,250 of that interest in the first month.

With an interest rate of 5 percent, the monthly payment is $790, with $417 of that interest in the first month.

“There’s such a big difference with these lower interest rates,” Nelson says.

Low interest rates paid by other investments, such as certificates of deposit and money market funds, also contribute to greater demand for farmland.

Say that investor with $100,000 is considering whether to stick the money into a CD or to buy farmland with it. The average one-year CD rate nationally is 1.03 percent, with the average five-year rate at 2.27 percent, according to the website. The investor potentially can return a higher rate of return buying farmland.

Using the Cass County numbers — $2,092 for an acre of cropland and $81.80 to rent an acre of cropland — the investor receives an annual return of 3.9 percent, easily besting the CD returns.

Farmland would become less attractive as an investment if the return on other investments rises,

“Even a few percentage points would have a big affect,” Swenson says.

More mouths to feed

Growing demand for U.S. ag exports also bodes well for the future, ag officials say.

The world is expected to add 76.4 million people this year and about 2.1 billion by 2050, according to the U.S. Census Bureau’s international data bank.

Foreign countries’ efforts to improve their people’s diets also increases demand for food from the United States.

Before 1995, China was a net exporter of soybeans. Now, the country accounts for more than half of world soybean exports, which the Chinese feed to hogs.

Chinese meat consumption per capita is less than half of American meat consumption per capita, promising further increases in Chinese consumption.

Wheat exports hold great promise, too.

World wheat trade will at least double by 2050, according to a new report from U.S. Wheat Associates, which promotes U.S. wheat exports.

Demand for wheat is growing fastest in countries where little, if any, wheat is grown, increasing export opportunities for U.S. wheat, the report says.

There also is greater demand for U.S. crops for uses other than food. Most notably, a third of the U.S. corn crop goes for the production of ethanol.

Nelson says he’s optimistic that things will turn out differently this time, given the significant differences from 30 years ago.

But farmers and others in ag need to guard against overconfidence, he says.

“I think this time is different. But you still have to be a little cautious,” he says.