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 re-inflation 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 report, lately “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.
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 Bloomberg, the 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 home ownership, 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.