The sky-high prices for corn, soybeans, wheat and other commodities are leaving growers loaded with cash to purchase more farmland, and what the farmers don't pay for themselves they may be able to finance easily with the record-low interest rates on loans.
Both cash and credit have fueled interest and acquisitions of land values across the Midwest, stoking fears of a bubble ready to burst. The concern isn’t if the bubble will break, but when.
“The concern clearly is not so much how much higher are they going to go, but when this bubble breaks, how low will they go and what will the aftermath of that be?” says Michael Hein, vice president of the Liberty Trust and Savings Bank in the southeast Iowa town of Durant. “If profits start to diminish, there will be an impact on land values as well.”
Hein dubbed the recent gain in land values “not sustainable” and says if they do rise in 2013, it will be at a more moderate pace.
An eventual drop in land prices is unlikely to be as painful as it was in the early 1980s, when new purchases were financed largely with debt and less with farmers’ own capital, say economists and bankers who work in the agricultural industry.
When interest rates on their loans soared and crop prices declined, many farmers no longer had the income they needed to pay the bank. They had no choice but to unload their real estate, contributing to the sharp downdraft in land values. Since that time, farmers have become more financially conservative, leaving them in a better position to weather a downturn.
But a drop in land prices now would mean farmers would lose the investment of their own cash rather than being left in a lurch with the local bank. It doesn't mean they won't feel the heat financially, but it's likely to prevent as many farmers from getting irreversibly harmed and, at the same time, limit the severity of a drop in land prices.
Last month, the U.S. Department of Agriculture (USDA) predicted more typical weather conditions in 2013 would generate a record corn and soybean harvest, which it forecast would push the average crop prices for corn to $4.80 per bushel, down a third from the prior year, and $10.50 per bushel for soybeans, a drop of 27%.
Ultimately, how land prices react will depend largely on the weather and if the water-starved Midwest receives enough moisture this year to help it rebound from the 2012 drought, the worst since the Dust Bowl of the 1930s.