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A farm land value bubble?

DANIEL LOOKER 12/14/2011 @ 12:13pm Business Editor

The big question on everyone’s mind after hearing that Iowa land values are breaking records is, is this a bubble?

Iowa State University economist Mike Duffy, who conducted the latest Iowa Land Values survey, says he’s neither a pessimist nor an optimist after compiling a survey that showed a record 32.5% increase in average Iowa farmland prices in the past year.

“I don’t see 30% again but I also don’t see a collapse,” Duffy says of outlook for future land prices trends. “I think there’s a lot of factors we have to watch but I don’t think this is a time to panic."

On the plus side, in spite of a recent decline in commodity prices, corn and soybean production is still projected to be profitable. And the levels of debt used to buy land are low.

Duffy is concerned that Iowa’s farmers, like farmers everywhere, are vulnerable to potential weakening of the world economy.

“China and India have been growing at a substantial rate and we need to think about what would happen if that slowed down,” he said

One factor that will put pressure on land prices could be rents. Rental rates in Iowa are historically low compared to prices. Duffy said he expects rents to go up at least 20% in the coming year.

“Rents are going to go up,” he said. “Thirty percent of the farmers in Iowa – all farmers – rent over half of the land they farm.”

As rents rise, the operating costs for those farmers will go up, potentially lowering returns and the ability of farmers to continue paying cash for land at ever higher prices.

Iowa’s current statewide average price for farmland, $6,608 an acre, is a record in nominal dollars. But it’s also a record in inflation-adjusted dollars. Just before the crash in land values in the 1980s, Iowa land values had reached about $6,000 an acre in the 1970s.

Land values saw similar spikes of about 30% a year in the late 1970s as well, but prices were driven in part by inflation at that time, something that’s not yet a factor in the overall U.S. economy.

Strong commodity prices were the main reason given by survey respondents for the current rise in land prices. It was cited by 86% of those surveyed. Low interest rates, cited by 62%, were the second main reason. Only 14% said it was because land is the best available investment.

The entire land values report can be found online here.

   

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