NCPA - National Center for Policy Analysis

Farmland: Yet Another Bubble?

April 5, 2013

First, the housing bubble popped in 2008. Then, recently, experts have warned about the student debt bubble and the commercial construction bubble. Now, Blake Hurst, a contributor to The American and a Missouri farmer warns that farmers have been taking on mounting debt, which could create a real estate bubble with farmland.

  • The past few years have been great for grain farmers in the Midwest who have made significant profits and now have cash to invest.
  • With interest rates lower than inflation, farmers are choosing to invest their profits into more farmland, which has triggered farm prices to boom.
  • Land prices in the most productive part of the Corn Belt were up 15 percent last year, according to Federal Reserve studies. The studies also found that prices were up 26 percent in the western Corn Belt and high plains.

With prices rising by double-digits in six of the last seven years, farmers are witnessing the value of their farms skyrocket.

  • Iowa land selling for $2,275 per acre in 2003 is now selling for $8,700 per acre.
  • The increased farmland market has been driven by well-financed farmers and outside investors.
  • The large farmers who are buying much of the higher-priced land are doing so by financing the new purchases.

The debt-to-asset ratios of farmers have increased since the 1980s and could become a serious problem if land prices fall quickly. The last time debt-to-asset ratios were high for farmers, the agricultural crash of the early 1980s triggered plummeting farmland prices and bankrupted many farmers.

  • The Federal Reserve has kept interest rates low, which encourages large borrowers who incur less cost when financing large land purchases.
  • When interest rates are eventually raised, the rapid increase in farmland prices will likely become volatile.
  • The government bailed many farmers out during the 1980s agricultural collapse but does not have the funds available today should such an event occur.

The Kansas City Federal Reserve recently held a symposium investigating whether a farmland bubble exists. A farmland bubble bursting would not cause catastrophic damage to the economy like the subprime mortgage crisis did. Nonetheless, farmers could be victims of the macroeconomic policy designed to restore the U.S. economy from recession.

Source: Blake Hurst, "The Next Real Estate Bubble: Farmland," The American, March 29, 2013.


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