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Is farmland the next real estate bubble?

A farmer harvests his corn crop in September 2007 near Morris, Ill.

TEXT OF STORY

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.

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As farm land goes the way of big business what happens to the rest of us who are trying to make a living in a place that is loosing its most important resource . . . Its population. I am school teacher that has been trying to sell a house in a rural community for 1500 days and here is my blog although it is far from ready I will be adding to it weekly. homelimbo.com. A story about what happens when everyone is moving out and no-one is moving in.

As farm land goes the way of big business what happens to the rest of us who are trying to make a living in a place that is loosing its most important resource . . . Its population. I am school teacher that has been trying to sell a house in a rural community for 1500 days and here is my blog although it is far from ready I will be adding to it weekly. homelimbo.com. A story about what happens when everyone is moving out and no-one is moving in.

Look at what this increae of the price of the family farm will cause the cost of Estate taxes to the heirs of the fanily farm.

Farm Commodities lack price responsiveness on both supply and demand sides. (CF. "Michael Pollan Rebuttal")No farm bill (Jared Van Leeuwan) doesn't stop this nor does subsidy reform. Farmers need price floors & supply management (bottom) and price ceilings with reserve supplies (top) as we had before 1996, but adequate ones (pre 1953).

If the government wants to cool down the price of anything in agriculture they can not renew the farm bill in 2012. I garuntee that that would pop any current bubble.

My bigger concern is how speculation will affect our food supply and rural communities when investors treat land and people as commodities. Doesn't seem like a recipe for a healthy or sustainable food system.

Tax Loss Farming is behind much of this, creating a self fulfilling prophesy. The WP subsidy story, like most others, was false on lucrativeness, in that farmers lost money in the market & subsidies only partially compensated (USDA-ERS). Price floors were lowered, causing the farm crisis, and went to zero in 1996.

There's one *big* difference between farmland and housing, which you mentioned at the end but should have been a centerpiece of your story: housing can only earn you money if you sell it at a profit. Farmland produces something that's actually valuable for itself.

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