Land prices not in a bubble

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Rick Huber, risk analyst for Farm Credit Services of America, in the most recent “Doane’ Agricultural Report” provided his way of analyzing whether farmland prices are in a bubble.

He noted that the big run-up in farmland prices seen in the 1970s did in hindsight turn out to be a bubble, and, therefore, the comparison is between today and almost 40 years ago. Through an economic process of evaluation, Huber ended up with a conclusion that prices aren’t in a bubble.

His conclusion is as follows: “Farmland prices are understandable and justifiable looking at the economics, unlike in a “bubble” atmosphere where values are grossly unattached to the empirical value.

Naturally, agricultural land prices will come down eventually, when the value of farm products declines and when expectations exist for those prices to remain lower. But that’s not a ‘bubble bursting.’ That’s the natural law of supply and demand at work, one of the few laws that can never be repealed.”



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Ken    
Batavia, NY  |  December, 26, 2012 at 01:37 PM

So let me try to understand this Huber guy. His last paragraph said that the decline in land values will not be a bubble bursting, but just the law of supply and demand......wow! So next year when farmers over plant corn and the price of corn drops to below 4 dollars, the huge drop in land values will not be a bubble bursting? Tell that to the banks that will be holding the popped bubble! Get ready for some land deals in a year or so. We would have had them already, except for the drought. If we have a good growing season along with obama economics the bubble will burst!

sdcpa    
sd  |  December, 27, 2012 at 12:08 AM

It's much different looking at 2012 vs 1985. The land is being bought with a substantial cash payment today. In 1985 land was being financed 100% with the assumption it could be sold if you coul;dn":t make the payemt. In 1985 land collapsed based on foreclosures, forced lquidations and a lack of income to make the payments. We watched the entire ag sector implode. One low priced land sale led to another. Market values collapsed and we saw bankruptcies everywhere. Today. land sales are sufficiently funded. We could see the retracement of land values without forced liquidations. Income is far different today as well. I wouldn't predict a bubble as long as 1 billion people don't have enough food to eat. We are in a far different income environment than ever before- don't let that lull you to sleep as it will change, it always does.

michael    
kansas  |  December, 27, 2012 at 11:31 PM

Ken's right and sdcpa is shilling for Credit Agencies and the other dingle berries that exist for & thrive from inflation. The difference between now and '85 is that the new land owners will bear 100% of the bubble burst impact and lenders will be off the hook. EQUITY, for the owner, will Deflate and they will be left holding ASSETS worth 1/2 of what they paid for them, as happened to Homeowners & 401K Equity investors who also paid cash for their homes and stocks, thinking they would be able to live and/or retire on the value accumulated. Haha on them, eh? What is the difference?... Lenders are off the hook. I've had personal experience with the FCS and their "glowing optimism" myself. I watched them crush friends' and neighbors' in the 80s by cutting off their revolving credit as they downgraded their collateral by 50%. In the years leading up to that crash, it was all rosy projections of never-ending profit and equity growth. Right up to the day they jerked the rug out from under them and sold them out. I wouldn't trust an FCS expert as far as I could throw one of their shiny, expensive office buildings - built after they sold out their clients (often to "friends" in the insurance business for pennies) and consolidated their lending units. If you do buy-in, I also hear there's some fabulous bridges and "reclaimed" swamp land back East for sale - cheap.

sdcpa    
Sd  |  December, 30, 2012 at 09:03 PM

Actually- I run a dairy, have a CPA practice and worked in the 1980's and 1990's for a farm bankruptcy firm that did Chapter 12's by the hundreds. FCS esists on loans-sales of money and margins doing so. if your home is an investment to flip, you deserve what you got. I worry about farms and their productivity, return on assets. I hated FCS- They threw 50 year customers under the bus. Understand- its your decision as a manager of your business what to do, either to expand your business, buy assets or anything else you do with your earnings. Most of my current clients went through the 80's. I had a client who didn't know whether to pay for stamps or milk. Anyone paying $13,000 per acre for land from a savings account will only receive a smaller return on assets when grains return to breakeven. Unsound financial assumptons create disaster. We saw rates go to 20% and people wit variable rates were swallowed by that bubble in the land market. What's going to happen when the dollar shrinks. By the end of the next 4 years of Obama, we'll have around $22 t in debt, with no way but to inflate our way out of it, (or default, which would really suck). Todays low- cost, fixed rates will be the only way to protect ourselves. We've already seen an election where the have-nots show they have greater voting power than the have's. What does your farm look like with $15 corn- $30 beans- $3 fat cattle- $2 hogs- $30.00 milk- 8.00 diesel ansd correlating expenses. You don't think tere will be inflation, what is Obama going to do, cut handouts and make everyone go to w If USD becomes worth half what is today, commodities will do well. By 2050 there will be 9 billion people


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