Will national debt erode land values?
Lately, about every survey of farm land values in the Corn Belt shows they're heading just one direction.
But, the upward climb in land values -- which have sent some higher-quality land to sales at around $14,000/acre in parts of Illinois and Iowa -- could be reaching its apex, especially when you throw in issues like the current talks on Capitol Hill about downgrading the U.S. credit and raising the nation's debt ceiling.
In fact, there's some mounting belief that current prices -- despite corresponding high grain market prices -- are no longer sustainable.
"I’m not ready to say it’s a bubble just yet,” says Mike Walsten of the Landowner Newsletter. "But looking ahead, will we maintain these current profitability margins (that allow farmers to bid up the price of farmland and cash rents)? Probably not."
"The extremes are not supportable by fundamental economics," adds Mike Boehlje, a Purdue University ag economist. Both Walsten and Boehlje shared their thoughts at the Purdue Top Farmer Crop Workshop in West Lafayette, Indiana, according to a report from Illinois Farm Bureau.
Though the recent economic conditions, namely the national debt situation that could start pushing interest rates higher as soon as the next week to 10 days, have a lot to do with the latest speculation about a farm real estate bubble, a look back at the last decade shows more signs that values could start slipping.
"Look at from World War II on. We've had 63 years of higher values and 8 years down," says Dave Kohl, Virginia Tech University Professor Emeritus of Ag finance and small business management. "Rght now, it's an asset bubble. Investors can't get any returns on Wall Street. So, they're getting in land. All of a sudden, if conditions change, what's going to happen to the bubble? A credit bubble goes 'kaboom.' An asset bubble goes slower."
With crop margins tightening, all it takes is one variable to change abruptly to throw the land value equation out of balance, and right now, that variable could be interest rates. "Our interest rates have been extremely low the last 4 years," Kohl says. "If they go back to normal, that's a spike in rates. A lot say we have a new plateau, a new normal. But, that's when you have to be very careful."
If rates do rise, the current price structure could change fairly quickly, Boehlje adds.
"Even farmers who pay cash for farmland to avoid interest rate risk are taking a major wealth risk when they pay prices well above $10,000 per acre," he says, according to Illinois Farm Bureau.
Despite that looming interest rate risk, another factor in play shows the land market is, as of right now, still in good shape.
"Competition for leasing land remains at an all-time high,” Howard Halderman of Halderman Farm Management told Purdue Top Farmer Crop Workshop attendees.