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Published November 07, 2011, 05:30 AM

Farmers, bankers fear rising farmland prices

WORTHINGTON, Minn. — Home values continue to fall in Minnesota, but the value of farmland has rapidly grown, spurred by very profitable grain prices. Vigorous debate abounds over whether agricultural land is another real estate bubble waiting to be burst.

By: Mark Steil, Minnesota Public Radio

WORTHINGTON, Minn. — Home values continue to fall in Minnesota, but the value of farmland has rapidly grown, spurred by very profitable grain prices. Vigorous debate abounds over whether agricultural land is another real estate bubble waiting to be burst.

People at the highest reaches of economic policy-making are sounding alarms over a potential farmland price bubble.

Earlier this year, the now-retired president of the Kansas City Federal Reserve Bank, Thomas Hoenig, complained about the Fed’s current zero interest rate policy. Cheap money artificially boosted farmland values in his home district, Hoenig says.

“Fertile farmland was selling for $6,000 an acre just two years ago,” Hoenig says. “That land today is selling for as much as $12,000 an acre.”

Hoenig predicts when current low interest rates reverse course and trend higher, land values will drop dramatically. He recalls from the 1980s what happens when a land price bubble bursts.

“In the Federal Reserve Bank of Kansas City’s district alone, I was involved in the closing of nearly 350 regional and community banks,” Hoenig says. “Farms were lost, communities were devastated.”

‘It’s crazy’

In the 1980s, land values reached record levels before falling by more than half, crushing rural America. There’s concern it could happen again as farmland prices continue to rise — up at least 20 percent in Minnesota over the past year.

“We have $7,850, anybody give me $7,900?” an auctioneer said at a recent land auction in southwest Minnesota. An auctioneer asked for a bid of $7,900 per acre. But the previous bid of $7,850 was too high for anyone to top.

“At 79 going once, 79 going twice, and I sold the farm 7850,” the auctioneer said.

Though the farmers in the audience anticipated this sort of price, several shook their heads in amazement anyway. Declining to speak on record, some wondered privately if the new owner can break even after paying a price for land that had been unheard of not long ago. Even the seller was surprised at the sale price.

“It’s crazy what farmland is going for,” Luing says.

Ken Luing, who sold the land in partnership with a sister and a sister-in-law, says he wishes the new owner luck at making a profit.

“I would think it would be awful hard,” Luing says. “Corn and bean price better stay up there.”

How long will

good times last?

Although grain prices have fallen in the last two months, they have been at near-record levels for much of the year. To some analysts, that lets the air out of the bubble argument. Purdue University Agricultural Economist Chris Hurt says highly profitable grain prices and record-low interest rates give farmers plenty of financial leeway to bid up land prices and remain in the black.

“You can go back to the basic fundamentals and say that, land today, given returns and given those low interest rates, is not overpriced,” Hurt says.

Depending on a farmer’s net worth, even paying $10,000 an acre can make economic sense, Hurt says. But that accounts only using current grain prices and current interest rates. What if things change? The good times farmers are using today to bid up land prices are not likely to last forever, Hurt says.

“There’ve been a lot more of those

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