Farmland Nearly Doubles in Last Five Years
After a winter of much coffee shop speculation, there is no hard evidence that Minnesota farmland is in a bubble that is bursting. Not yet, at least.
Wintertime worries across the state have suspected a farmland bubble bursting that would send the states economy into a downward spiral like the housing market collapse did five years ago. Most worrisome were fears we might be entering a period of collapsing land prices and commodity prices, triggering something like the farm financial crisis of 1982-1987.
That hasn’t happened yet, said Steve Taff, the University of Minnesota applied economist who does an annual survey of farmland sales and estimated farmland values for the state each year. His 2014 report, based on land sales in the first nine months of last year was updated and released on March 20.
Farmland sales in Minnesota and neighboring states are still pushing up expensive land prices while bankers surveyed by the Minneapolis Federal Reserve Bank and by USDA statisticians say land prices and rents are moderating, and may be falling.
On top of that, Federal Reserve banks of Chicago and St. Louis found farmland in their districts continued to rise in 2013 but were falling in the fourth quarter last year as farm commodity prices fell.
These different research findings aren’t contradictory, said Taff. Timing and the nature of the reports differ, thus documented land sale data and surveys of banks’ agricultural credit conditions are like mixing apples with oranges.
Taff’s annual Minnesota Land Economics update covers actual land sales for the first nine months of the past year. Sales were slow, based on that data, but are probably more in line with what would be “normal,” he said, after some aggressive years for land transfers.
Looking beyond October, economist Joe Mahon wrote in the Minneapolis Fed’s Fourth-Quarter 2013 Agricultural Credit Conditions Survey report that farm incomes fell and land values weakened in the fourth quarter. Those agricultural credit conditions were consistent with other Fed bank surveys in farm country.
What no one can say or even properly define is what constitutes a farmland bubble, when any moderation or retreat is a “burst” or just a correction, or what weather and markets will do to farm economics and farmland prices going forward.
David Bau with the University of Minnesota Extension Service found in a separate study that farmland prices climbed 35.6 percent in the 14 counties of Southwest Minnesota. That followed a 33.2 percent increase in 2012.
In a late January article published by Walnut Grove's Sentinel Tribune, Bau noted the area average land price climbed from $4,687 an acre in 2011 to $8,466 this past year. This is the type of increase triggering talk of “bubbles” at coffee shops in the region.
Taff’s Minnesota Land Economics data show assessors’ estimated land values climbing like that in most parts of the state.
For instance, in Swift County’s Pillsbury Township, in West-Central Minnesota, the estimated value of farmland rose from $3,534 an acre in 2009 to $4,091 in 2011 before jumping again to $6,301 last year. In far Northwest Minnesota, Marshall County’s Wranger Township had land prices climb from $1,181 an acre in 2009 to $1,454 in 2011 and $2,940 last year.
In South-Central Minnesota, in Blue Earth County around Mankato, Rapidan Township land prices rose from $4,062 per acre in 2009 to $4,718 in 2011 to $7,808 last year. And in the Southeast corner of the state, land prices in Wabasha County’s Pepin Township rose from $3,520 per acre in 2009 to $4,152 in 2011 and $5,196 in 2013.
Time will tell if these land values represent a bubble. This much is clear: they are not mere adjustments for inflation. Historically, two drivers of farmland prices have been commodity prices and interest rates. Low interest rates encourage investments in hard assets; high futures prices for major commodities encourage investment in land on prospects of high farm income.
While those are factors, the land market is always more complicated. Business publications frequently note that Wall Street investors “park” money in farmland. That isn’t easy to do in Minnesota and a few other states with anti-corporate farming laws, but land prices do reflect prices in surrounding states.
Thus, land speculation could be driving prices higher than commodity prices would suggest as prudent. But low interest rates and the low income earnings from financial instruments, too, could influence that.
Signals from the commodity markets are mixed. Corn prices, for instance, fell from a high of $8 a bushel in July last year to about $4 a bushel at country locations in Minnesota by year’s end.
Corn prices rose to $4.90 a bushel on Monday, and wheat prices were also rising. In a Tuesday commentary for the Minneapolis Grain Exchange, Steve Georgy of the Allendale Inc. brokerage said global markets are weighing likely trade impacts from the crisis in the Crimea and Ukraine.
Tensions with Russia become yet another influence on prospects for farm income and a speculative influence on what Minnesota farmland is really worth. All this makes recognizing a bubble difficult, even when you might be looking one straight in the eye.