Is farmland the next real estate bubble?
A farmer harvests his corn crop in September 2007 near Morris, Ill.
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Kai Ryssdal: Timothy Geithner was up on Capitol Hill today testifying about the TARP. The Treasury Secretary was trying once again to convince a congressional panel that the bank bailout did what it was supposed to do: save the economy after over-speculation in an asset bubble. That is to say, in English, all those mortgage-backed securities based on residential real estate.
But as we deal with lingering reminders of the subprime mortgage crisis, there's another asset class bubbling away: Farmland. Prices are up almost 60 percent over the past decade and still climbing.
Harvest Public Media's Kathleen Masterson has more.
Auctioneer: 8,000 bid. Now 8,050, 50, 50...
Kathleen Masterson: It's standing room only at this auction just outside of Ames, Iowa. Up for bid are three parcels of farmland that were owned by the same family for three generations. The room is packed with more than 100 people, mostly older farmers in flannel and their wives and a few out-of-state investors.
Auctioneer: 8,850, I'm asking 89 there. 8,950...
In the end, an investor from California dropped out. The 80-acre plot sold to a local buyer for nearly three-quarters of a million dollars.
Auctioneer: I've sold it -- 8,900.
That's $8,900 an acre, double the average price in Iowa from just last year. Farmland prices in the Midwest have been shooting up over the past year, and even over the last few months. All this buzz about farmland has caught the attention of the FDIC. Part of the FDIC's job, says chief economist Richard Brown, is to worry about these things, to worry about signs that, like the housing market, things could get out of control.
Richard Brown: The asset price movement that we're watching right now is farmland values, which have increased by 58 percent over the past 10 years, after inflation.
That's led big financial companies like MetLife, John Hancock, and TIAA-CREF to ramp up investment in agricultural land. Part of the reason land prices have risen so high is the soaring costs of crops, a notoriously volatile commodity. Right now, grain is up, but not as much as land prices.
Brown: Our sense is that land prices have risen faster than the underlying fundamentals, and again, that's indicative of a boom. But I think what would be more worrisome is if we saw an unstable debt structure under that.
And that last part, that's good news. Farmers and others buying land right now are cash rich, meaning they're able to put money down. So we're not seeing the kind of crazy borrowing that led to the 80s farm crisis. But there are some small signs that make economists wary.
Jason Henderson with the Federal Reserve Bank of Kansas City says he's starting to hear that some farmers are borrowing against the high value of their land. He has this example:
Jason Henderson: Farmers own say 500 acres with no debt on it, they're using equity in that parcel of land to purchase another parcel.
Henderson says there's talk of investors buying farmland as a hedge against inflation. Still, there just isn't that much farmland on the market. Low interest rates and an unstable stock market means that, for many farmers, owning land is a better retirement option.
Randy Hertz: People say I'd rather own a hard asset, own some farmland. Then if I convert that to cash, and put it in bank, what will I earn on that?
That's Randy Hertz, president of Hertz Farmland Management, Inc., based in Iowa. Hertz has been in the business for several decades. He says he's not worried about a bubble, not yet anyway.
Hertz: If the wheels fall off our commodity markets, which they will go down, what goes up does come down, and I do not expect wheels to fall off the land market.
The key question is whether high farmland prices are just a result of speculative buying or are they really supported by farmland's ability to make money. One thing investors are counting on is a continuing demand for that non-luxury item we call food.
In Ames, Iowa, I'm Kathleen Masterson for Marketplace.