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Minnesota Land Prices Fall; a Hint of a Bursting Bubble

August 12, 2009 By Lee Egerstrom, Economic Development Fellow
Minnesota farmland prices fell by 3.3 percent in the past year prior to this spring's planting season, and pastureland prices for the troubled livestock sector have fallen by as much as 5.4 percent, according to a U.S. Department of Agriculture study that predicts land sales and rents prices from targeted regional surveys.

The projected decline in land values would be the first since 1987, the last year of the severe rural recession that has come to be known as the Farm Financial Crisis of 1982-1987.
The USDA report, issued Aug. 4, is the first clear indication that farmland and farm real estate are not immune to the crashing real estate markets for housing and commercial properties. How much farmland is part of the sub-prime mortgage crisis and financial industry meltdown, or influenced by pressures on other real estate markets isn't yet known.

USDA findings are consistent with declining income projections from lower crop and livestock prices. Nationwide, farm income is forecast to fall by 20 percent this year, to $71.2 billion, as prices for all major farm commodities have dropped from record highs set in 2007 and early 2008.

A more definitive look at Minnesota's land market, well after the fact and based on actual land sales data, will be compiled in an annual farm real estate report by University of Minnesota applied economist Steve Taff. That study tracks land sales from September to September and is issued each spring.

"What we do know from the past is that our land sales data do track pretty closely with the USDA forecast," Taff said.

At the same time, Taff said it is far too early to say that a farm real estate "bubble" has burst along with the housing and commercial real estate markets.    

The USDA study found that Minnesota cropland decline by 3.3 percent between 2008 and a period in early June this year, while the value of pastureland fell 5.4 percent. In keeping with these land costs, field surveyors for the government said cropland cash rent prices for the current year also moderated, following on average to $20.50 per acre from $21 a year ago.

One hates to use a Minnesota "average" price because land quality, climate, topography and agronomic uses vary enormously across the long state, north to south. Nonetheless, the USDA survey found an average Minnesota farm real estate price of $2,870 in June this year, down from $2,970 a year ago, despite some prime farmland sales known to reach upwards of $8,000 an acre.

Minnesota 2020 warned in a May 6, 2008 report, Minnesota's Bubble Economy: The Critical Need to Prevent our Farmland Boom from Busting, that high land prices being paid in some parts of the state suggested another real estate bubble was forming and thus threatened the agricultural economy. Land purchased within the past few years may still prove to be too highly leveraged for current commodity prices as those prices are off by double-digit margins from a year ago.

High quality land in Minnesota is bringing from $4,000 to $5,000 an acre this year, and mid-quality land is selling for around $3,000, according to the Omaha-based Farmers National Co. In a report published by the Tama News-Herald and Toledo Chronicle in Iowa, a regional sales manager for the Farmers National land company said lower quality land in Minnesota and Iowa had fallen by about 15 percent although prices in Minnesota have fallen less across the board than in Iowa.

Going Forward
Minnesota Agriculture Commissioner Gene Hugoson announced at Farm Fest a week ago that he's cranking up some of the farm debt counseling and assistance programs left on the shelves from the 1980s farm crisis. This is wise.

Going forward, Minnesota state officials, rural community leaders and agricultural and finance organizations will need to closely monitor farm finances and financial institutions. The housing and commercial real estate problems can spill over on the agricultural economy regardless of where commodity prices and farm income prospects go during the remainder of this year.

Two links exist binding housing, commercial and farm real estate markets. The first linkage is through the lenders that serve all three markets. The Federal Reserve and Treasury Department have stepped up efforts in recent months to help banks troubled by weak and non-performing commercial real estate assets. As reported by the economics blog, property consultants Foresight Analytics forecasts that commercial real estate loan losses will reach $250 billion. That could cause another 700 banks to fail.   

A second link is not well researched. It involves land investors whose presence in the farm real estate market stabilizes prices even when traditional farm investors might hold back because of weak land income prospects. What isn't known is when these passive investors will pull out of the farmland market and migrate into other markets, either at home or abroad; and what their presence or absence will do to the land market.

Minnesota 2020 warned in its earlier report that a land bubble could form and burst with grave consequences to the rural economy. We are getting closer to seeing deflation in land values, which would produce the feared consequences of a bursting bubble.

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