The Next Real Estate Bubble Has Already Begun (But It’s Not What You Think)

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Daniel Acker / Bloomberg / Getty Images

Corn is planted in a field outside in Henry, Ill., on May 14, 2013.

The American public is, for obvious reasons, a bit gun-shy when it comes to asset bubbles. Ever since the financial crisis, market watchers have worried about bubbles in the stock market, in high yield debt, and even the reinflation of the real estate bubble. The latest asset class to receive worried attention from policy makers? Farmland.

That’s right, according to The Financial Times prices on U.S. farmland have doubled over the past decade, and are on pace to rise more than 10% again this year, even in the face of weaker grain markets of late. The main force that has been driving the increases in farmland prices has been a steady bull market in agricultural commodity prices. But according to the FT reportlately “big investors” have been dipping their toes into the farmland market in an attempt to take advantage of high agriculture profits and as a hedge against inflation.

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This run up in prices, combined with the fact that interest rates are at historic lows, have some land owners and policy makers worried that this bull market could end in heartbreak for many of America’s farmers — especially in the Midwestern corn belt, where price increases have been most pronounced. The dynamic has gotten the attention of the Federal Advisory Council, a group which advises the Federal Reserve on monetary policy. According to Bloombergthe council warned the Fed in February that, “Agricultural land prices are veering further from what makes sense . . Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.”

The effect of a farmland bubble bursting, however, probably shouldn’t be of much concern to those of us not directly involved in agriculture. As real estate economist Robert Shiller wrote back in 2011, “farmland is much less important than other speculative assets. For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the U.S. stock market and $16.6 trillion for the U.S. housing market.”

Since the value of farmland is about 1/8th the size of the residential real estate bubble, and because ownership of farmland is much more concentrated than homeownership, it’s highly unlikely that the bursting of a farmland bubble would pose any systemic risks to the broader economy.

Price declines, however, do pose a risk to small farmers, especially those who are heavily indebted. Large debt loads exacerbated an agriculture crisis in the late 1970s and 1980s, as declining crop prices forced heavily indebted farmers to sell their land, creating a negative feedback loop similar to that which occurred in residential real estate in the 2000s. But according to The Financial Times report, debt is much less common on farms these days:

“Unlike the last bust of the 1980s, farmers’ debts are also low relative to their assets. Fertile land is not a crowded trade. Managers say they believe that less than 1 per cent is held by institutional investors, with cash-rich farmers bidding for the rest. In some states such as Iowa, institutional ownership is banned.”

That being said, critics of the Federal Reserve’s low-interest rate policies will surely use this most recent run up in farmland prices as a reason to petition for the central bank to wind down its stimulus programs. Despite recent news that some at the Federal Reserve are keen to start this process, it’s clear that the man in charge — Ben Bernanke — thinks an aggressive stance is the correct one, at least in the short term.

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6 comments
Mark_Weber
Mark_Weber

I know farm land in Canada is in high demand from Asian countries that don't have enough land to feed the population. A Canadian client just sold his farm land. It would be a shame to see our farmlands in the US turn into rice paddies but that could be one possible future.

mark.alright
mark.alright

Well I hope the same thing does not happen as it did last time. That is why I moved 1/3 of my assets to Bangkok Thailand to make sure the crash when it comes does not kill me across the board like last time.

PoliticsNxtDoor
PoliticsNxtDoor

In a story I'm doing tomorrow, I wanted to talk about why it is that no one ever notices the creation of the "bubble" but we all seem to feel its pain once its burst. There is an agenda at work and no one wants to be responsible for the false sense of security it imposes. There is a bubble, several being formed...and the day will come.

BeeFarms
BeeFarms

historically (i mean ALL of "history" btw), no other asset even comes close to LAND. not even close. the problem is there's just not much farmland available at any given time. a real illiquid market.  you can't just buy and sell land like stocks etc. 

deputystumpy
deputystumpy

@BeeFarms Blue chip stocks have outperformed farmland by a wide margin over the decades.  Buying a farm in 1970 and holding onto it would have made you wealthy.  Putting the same amount of money into Colgate-Palmolive stock would have made you SUPER RICH.