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The hottest commodity in the US agricultural market is not wheat, corn or soyabean – but rather the very farmland used to grow those and other crops
Fears of US farmland bubble echo history
By Javier Blas, Commodities Editor
The hottest commodity in the US agricultural market is not wheat, corn or soyabean – but rather the very farmland used to grow those and other crops
The Chicago and Kansas City branches of the Federal Reserve have reported this week unusual price rises for farmland, prompting concerns of an emerging bubble only four years after the collapse of the housing bubble that triggered the 2008 financial crisis.
For the first time since the Kansas Fed started tracking the ups and downs of farmland prices in the Plains region in the late 1970s, the costs have grown by 20 per cent in two consecutive years.
The Kansas Fed said prices for non-irrigated land rose 25 per cent in the first quarter compared with the same period of 2011, while irrigated cropland surged 32 per cent, the biggest year-on-year jump in history.
The story was similar in the Midwest cornbelt, where the Chicago Fed reported that farmland prices surged 19 per cent in the first quarter compared with the same period of a year ago.
Worryingly, the large price increases mirror those of the US housing market in the mid-2000s. Worse, when private-sector farming bankers explain to the Fed the situation in the sector, they sound much like their colleagues in the housing market. One banker from south-east Wyoming warned about the arrival of inexperienced buyers: “More buyers are out-of-town investors.” Another from north-east Kansas added: “There is more liquidity in the farm sector than I have seen in my 30 years as a banker.”
In spite of the concerns about a bubble, the narrative behind the price surge is strong: the cost of agricultural commodities is rising sharply just as US farmers expand their production, bringing historically high earnings to the sector. Corn rose to about $8 a bushel last year, a record high. The price of the commodity remains elevated this year, further beefing up the balance sheet of farmers.
Moreover, farmers are generally paying cash for the farmland, rather than financing the purchases through loans as was the case in the housing bubble. Indeed, credit demand in the farming sector is at the lowest since at least 2004, according to the Kansas Fed.
But the strong narrative and the cash payments cannot hide that prices are out of control. For example, in Nebraska, the cost of irrigated farmland surged in the first quarter to a staggering 41 per cent.
The US experienced a farmland bubble in the 1980s that bankrupted farmers in the Plains and the Midwest. The current surge in prices could have more solid foundations, but the Fed needs to monitor the situation closely to make sure history does not repeat itself.
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