|Average price of farmland in Iowa,|
adjusted for inflation and unadjusted
(click on image for larger version)
"Just a few years ago, farmers marveled as land prices began to rise in response to demand for corn to make ethanol," Neuman writes. "More recently, soaring prices for wheat, corn, soybeans and other crops have driven the increase." When adjusted for inflation agriculture grain prices are close to reaching their peak in the late 1970s before the last farm land boom-and-bust cycle. "History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets," said Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, in testimony before the Senate Agriculture Committee last month.
The bank warns that rising interest rates combined with a drop in crop prices could drop farmland values by a third to a half, Neuman writes. "It’s very hard to guess what a property will sell for these days because it seems like it’s been changing on a weekly basis," said Mike Green, an auctioneer. The rapid rise in farmland prices led the Federal Deposit Insurance Corp. to send a letter to lenders in December "warning them to not let high farm land values lull them into lax lending practices," Neuman writes. Despite the fears, some like Michael D. Duffy, an agriculture economist at Iowa State University, don't think a bubble is emerging. "If you’ve got good ground, it’s worth a lot of money," he said. (Read more)