Should We Be Concerned About A Bubble?

What Causes Farmland To Drop In Value?

Farmland rarely drops in value.  It has, on average, gone up in value by 3% to 5% each year.  Recently it has jumped as high as 25% per year.  This has raised a fear of a bubble much like what happened to the housing market.  Will farmland continue to rise 25% per year in value?  No.  Odds are it will go back to normal rates and raise in value of 3% to 5%.  In the past 100 years farmland has dropped in value only three times.

First time was the great depression.  Everything fell then.  Nothing in this country was safe.

The second time was 1980.  It dropped five years straight.  The reason was farmland was driven mostly by debt.  Much like the recent housing market collapse was driven by debt.  Also. during that time we put a trade embargo on Russia.  Commodity prices dropped due to this.  So the combination of debt driven land and the Russian trade embargo led to this drop in value.

The third time was 2008.  That due to fear from what happened at the beginning of the recession.  That only lasted one year.  Since then value has skyrocketed because many investors looked to safer investments to the stock market.  So land was being bought cash and rarely bought with credit.  The charts below explains this well.

Let's compare farmland to another popular asset.  Let's take gold for example.  You hear about how gold is the way to invest.  One issue is, what is gold if everything does collapse?  Pretty much a paper weight.  Farmland is something useful.  Because, no matter what, we are always going to have to eat.  Since 1919, farmland has cost approximately 2.4 ounces of gold per acre.  This year, the ratio nationwide is 1.6 ounces per acre.  I'll leave you with a couple quotes that back up this claim.

"The time to worry is when debt financing on farming is growing more rapidly than prices, and we aren't there yet."  David Merkel.  The Economist.  April 10, 2011.

"Land Bubble?:  There is data circulating that "78% of Iowa farmland is now owned debt free."  The data is from "2012 Iowa Farmland Ownership Survey."  From my perspective this decreases the amount of land that will be sold in panic if crop prices drop or profitability tightens.  Further backing up my belief that we are not on the cusp of bursting the so called "Land Bubble."  Van Trump Report June 11, 2013.

"Unlike the last bust of the 1980's, farmers' debts are also low relative to their assets.  Fertile land is not a crowded trade.  Managers say they believe that less than 1% is held by institutional investors, with cash rich farmers bidding for the rest.  In some states such as Iowa, institutional ownership is banned."  The Financial Times May 2013.