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Farmland ‘supercycle’ or bubble?

Farmland bubble. Those 2 words have been the topic of reams of speculation in the last few months, and that speculation should zero in on a few key factors through 2013, experts say.

First, don’t overlook the cyclical nature of the marketplace. Nailing down where exactly we are in that linear cycle is the key to determining where land is headed in the near future, says longtime ag economist from Virginia Tech University, Dr. David Kohl.

“We’re 10 years into this commodity supercycle, and a lot of that behavior’s being invested into the farmland market,” Kohl says. “Now, we’ve been on a 25-year bull market in land and one of the things people will ask is ‘Are we long in the tooth?’ Historically, when you see outside investors in the marketplace and marginal land bringing premium prices, you’re generally long in the tooth as far as the cycle is concerned.”

‘Long in the tooth?’

And, right now, Kohl says those circumstances have reached fruition, especially in the Midwest. Though only about 10% of the nation’s farmland is owned by what’s considered “outside investors,” Kohl says another 30% to 40% of farmland’s owned by “60- to 90-year-olds because they don’t trust Wall Street.”

And, “One of the things we’re starting to see is our marginal farmground is bringing a premium price,” Kohl adds, making up the other variable that could indicate the cycle could be turning.

Dr. David Kohl, Virginia Tech University ag economist, talks about some of the factors influencing whether the farmland market is poised on a bubble or not (video by Mike McGinnis).

But, whether that turn in the cycle happens also depends on 4 factors. A change in even just 1 or 2 of them could be enough to make that happen, Kohl says. Those are:

  • Interest rates.

  • A slowdown in global ag markets, especially emerging ones.

  • Major change in U.S. monetary policy.

  • A downturn in domestic demand factors, namely biofuels.

“We would have to have a major increase in interest rates. Do you know what a spike in interest rates right now would be? From where we are currently back up to 6.5%, or the average,” Kohl says. “As long as [all 4 factors] stay in place, we’re going to see appreciation of land values. But, lose one of those or a combination of those, that’s where you can see a correction.”

Adds University of Nebraska ag economist Bruce Johnson: “A cheap U.S. dollar...has promoted U.S. exports; while the associated record-low interest rates have discouraged landowners from selling their land holdings, creating a scarcity-driven agricultural land market. And while agricultural land is not exactly a toxic derivative, some portion of recent value gains is based on a financial environment that is not sustainable. Since interest rates can’t get any lower, it’s only a matter of time before they rise; and when that happens, land values will turn downward.”

Land-specific variables

Those are the key variables in the context of agriculture in general; what about the land marketplace specifically? How does the market play in terms of its potential for building a bubble? Today’s upward-trending marketplace is punctuated occasionally by sales that stray well beyond the average price window. That’s a sign that those buying the land aren’t likely as far-leveraged as many in the marketplace were during the 1970s and 1980s, when the last crash in farmland occurred. But, that’s something of a double-edged sword, says University of Nebraska ag economist Bruce Johnson.

“Recent market participants, buying at the top of the market have generally had considerable financial means. So a total agricultural land market meltdown seems remote,” Johnson says. “That said, however, I believe there is still some ‘overshoot-nonsense’ in  the market today that is not reflective of the basic fundamentals, and will need to be purged to get back to more ‘sustainable value’ levels.”

If that purge takes place, it could take 30% of current land values -- which have doubled over the last 5 years in Nebraska -- in “a few short year,” Johnson says.

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