No farmland bubble building, expert says
Despite factors like interest rates, grain demand, and crop insurance payouts that could tighten farm profit margins to the point that could turn the tide away from the surge in farmland values, one land expert says he's still bullish on the market that's showed few signs of cooling to date.
Even if farmers bounce back and raise a monster crop in 2013, that won't necessarily send land through the floor because worldwide grain demand will continue to surge, says Murray Wise, farmland realtor, broker, and land market expert with Murray Wise LLC, in Champaign, Illinois. It certainly doesn't warrant claims that there's a bubble building in the marketplace.
"Current commodity prices resulting from increased global demand have producers in position to have outstanding cash income . . . even in a severe drought year," Wise says. "Simply put, farm income supports those values."
What about the anecdotal increase in land sales around the Corn Belt in recent months? It's not a sign of a long-term weakening land market, but the addition of new incentives for farmers -- retiring or otherwise -- to sell land to avoid a potential fiscal penalty in the short term.
"There has been a modest increase in the supply of land being offered in Iowa and Illinois. For years, I’ve felt that there was no clear financial incentive for retired farmers and folks who inherited land to sell. Where would they invest to do better? Frankly, no other reasonably stable asset class could match the total return on quality farmland. Nor would the alternatives be likely to match land’s inflation protection," Wise says. "However, today, I think the potential increase in the capital gains tax we’re facing has made selling somewhat more attractive. Couple that with the relative speed with which land can be transferred via the auction sales method, and I think we’ve identified the impetus for the increased supply."