Will farmland bust? Here are 3 key variables
Is the farmland market -- one many experts say is starting to level off from the boom in values over much of the last decade -- just taking a breather from its rocket ride higher, or is the expected leveling an inevitable function of the marketplace?
History has certainly proven the cyclical nature of the land market; the last century of land market observations reveal a few common drivers of that cycle. But is today different? "Speculation on what is happening and what will happen to Iowa farmland values abounds," says Iowa State University Extension ag economist and farmland values expert Mike Duffy.
Obviously, farm income is the primary key to rising or falling land values. And, just as it's so important to the farmland equation, it's also far from clear exactly where the average farm's income is headed in the near future, and how it will manifest itself as a key land variable, Duffy says.
"What happens to farm income will have a direct bearing on land values. While it isn’t a perfect correlation, it is a strong one," he says. "I think some of the factors that created the busts we saw after the past two booms haven’t been as strong this time."
So since income is something of a wildcard right now, Duffy has stepped back to examine those two land booms of the last century; he looks at how they unfolded and what ultimately happened to the land market and those with stakes therein. The first of these golden eras was from 1900 to 1920, Duffy says, a time when rising corn prices sent land in Iowa up almost 500% in the first 19 years of the century. Then came the early 1970s.
"The second boom period, 1973 to 1981, has been referred to as the second golden era in agriculture. Land values in Iowa increased by over 30% per year in 1973, 1974, and 1975. Over the entire boom period, Iowa farmland values went from $482 an acre in 1972 to $2,147 an acre in 1981, an increase of 345%," he says.
Prices and returns
Those two past boom times have some similarities and some differences when viewed with the meteoric rise in land values of most of the last eight to 10 years. Though these cloud the crystal ball, there are three common features of the boom cycles that could shed light on how the current one will unfold. The first is a simple matter of dollars and cents.
"One feature is that the booms were driven by increasing prices and returns. A 1967 publication by the State Historical Society described the first boom period: 'For agriculture this was prosperity piled on top of prosperity,'" Duffy says. "The second boom in the early 1970s was fueled by the rapid rise in commodity prices due in part to the opening of major export markets. Corn prices in Iowa averaged $1.04 per bushel in 1972 and they averaged $2.58 per bushel in 1974."