Reuters recently published an article about soaring prices for farmland in America's Midwest and Plains states. At at recent auction in Iowa, a 60 acre parcel recently sold for $420,000. At $7,000 an acre it was a relative bargain. Elsewhere in the state, prime farmland is now often selling for $10,000 or more per acre, and another recent auction in the state saw the bidding war close at $16,000 per acre. Farmland hasn't experienced this kind of price inflation since the late 70's, when the average price per acre rose from around $419 per acre to well over $2,000 by the end of the decade.
Of course, most of us know that that previous run up in farmland values proved to be a bubble, and when it burst in the early 80's it was accompanied by the bankruptcy of many thousands of farmers in the Midwest, as well as the loss of a generation of future farmers who decided it was too risky or too expensive to follow in their parents footsteps and take over the reigns of the family business.
Some things about the current state of agriculture in the US are reminiscent of the volatile boom and bust era of the late 70's, while other conditions differ. There is concern within the Fed and amongst leading agricultural economists about the sustainability of current farmland prices and the implications for the farm economy, but no consensus as to whether or not we are on the cusp of another bubble.
Nonetheless, their is common agreement that the face of America's farm economy is on the verge of another transformation.
One of the changes that is already unfolding is the greying of America's farmers. Those farmers who were able to ride out the storm of the collapse during the 80's are now in their sixties or even older. An Article in the Financial Post sums it up best:
When the U.S.’s rural economy eroded in the wake of the 1980s farm collapse, many families encouraged their progeny to leave the land and find their economic fortune in America’s cities.
The kids left. Many of them they stayed away. As the years passed, that familial loyalty to the land faded. Today, about 20% of Iowa farm land is owned by people who don’t live in the state, according to Iowa State University data. The average Iowa farmland owner is a single woman – often a widow – who is over the age of 70.
(emphasis mine)
That same article describes the decision by the children of a deceased farmer to sell the 153 acre farm that had been in the family for generations. The youngest among them was 60 years old, and they had all moved away to different parts of the country. They auctioned the farm off for $1.2 million dollars. That's a lot of money, at least in my book, and a 153 acre farm is not a big farm in this age. Even if there were young people lining up to bid on such a farm, few would be able to afford it in today's economy. As the old saying goes, they ain't making any more land. Indeed, farm acreage continues to shrink in the country, even as the average farm size continues to grow.
Farmland, especially prime land of any sizeable acreage, doesn't come up on the market all that often. Farmland in close proximity to cities has been nibbled away at for years due to suburban and exurban growth, which raises land values as competing land use opportunities raise the opportunity cost of maintaining it in agricultural production. But prime, rural farmland is at a premium, and when it comes available on the market the competition is hot among existing farmers who wish to increase their acreage and the scale of their operations. Another fairly recent development is the entry by finacial actors...mutual funds, investment groups and private equity players, for whom farmland has become a current darling in terms of an investment asset class. While most farmland is still privately held, the share of land owned by these investors is increasing, and is now in the neighborhood of around 22%.
A recent Fed report states that land values have increased by about 25% in just the past 12 months. That is an average figure, however, and includes land prices in parts of the southern Plains that have seen lower inflation in land values due to the droughts that have plagued the region. In states like Iowa and Nebraska, the increase has been as much as 35 or 40%. That is on top of double digit rises for previous years as well.
As with the 70's boom cycle, much of this inflation has been driven by rising commodity prices driven by strong overseas demand for grain. One new factor, however, has been the growth of the ethanol from corn market, which ironically was brought into being by Jimmy Carter. Fueled by both subsidies and a federal mandate which requires that 12.6 billion gallons of ethanol be produced by the end of this year, corn prices are at record levels. We are currently not meeting that mandate target. We currently produce about 10 billion gallons of ethanol, yet even at that level more than 40% of our corn harvest is consumed by the refiners. In 2015 the mandate increases to 15 billion gallons, and by 2022 the goal is 36 billion gallons.
What are the implications for food prices if that policy remains in place? Already, feed prices have risen for poultry and livestock producers so much that it has contributed to the food inflation we are experiencing in the grocery store. I don't think this is sustainable. There is a rare bipartisan consensus to allow these ethanol subsidies to fuel mixers to lapse at the end of this year, but nobody is talking about backing away from the mandates for ethanol use. The demand will continue for ethanol production, with or without the subsidies, so corn prices will likely remain both high and steady.
One reason there is debate as to whether we are in danger of experiencing a bubble in farmland prices is that population growth and rising incomes and demand in developing countries seem to suggest an era of prolonged commodity price inflation. Also, much of the land acquisition and farm concentration of the 70's was fueled by highly leveraged borrowing on the part of farmers. When commodity prices fell and interest rates increased, they were immediately underwater. Today, most bankers require 50% cash down to make a loan for farmland, so farmers are not nearly as leveraged. If land prices were to fall sharply, the thinking goes, they are better positioned to ride out the storm.
Of course, the flip side to that is that as farmland prices soar to unheard of levels, while credit terms require a 50% cash down, fewer and fewer people can afford to purchase those farms that do come up for sale. Increasingly, only institutional investors will be able to seize those purchasing opportunities. For the farmer who is not planning to sell anytime soon, however, current land valuations may make him wealthy on paper, but in terms of his bottom line and annual operating costs the impact is negative. His property taxes increase with the soaring market, but that expense does nothing to increase his yields or topline revenue.
I think we are at a point where we are about to see another generational shift and change in the farming landscape. Many, many farmers have reached the age where they have to make a tough decision about the future of their farm. The generation they brought into the world, and even that generation's children, have increasingly decided not to follow that path and have turned their backs upon farming as a career.
Into whose hands will those farms pass? To what purpose will the land be used? What are the implications for America's agricultural sector and for future food prices? I'm not sure, but it seems our Congress, while loathe to address waste in the Farm Bill, is equally loathe to consider such questions in terms of the long run or to come up with any real food policy.
As another old saying goes: "If you don't know where you are going, you will surely get there."