Tuesday, January 25, 2011

"Could Plunge Rural Areas into a Freefall of Land Prices..."

source: Iowa State [pdf]

2010 Farmland Value Survey (Iowa State University)

For the farmland price junkies who frequent this site, Dr. Michael Duffy's updated 2010 report on Iowa farmland prices out of Iowa State contains graphs, charts, and numbers to drooool over. [pdf] According to the report, though land coming up for sale is scarce, investors represented 25 percent of the sales in Iowa last year.

Speaking about one of my favorite subjects, the cost of production, which appears to be ever more volatile, here's Duffy:
The estimated costs for producing an acre of corn and soybeans have risen over 40 percent since 2006. The estimated costs are up 16 percent since 2008 but they are down 7 percent since 2009. The volatility in prices and costs leads to tremendous uncertainty and volatility in the land market.
Reasons he gives for rising values of farmland include:
  • scarcity of land coming up for sale
  • farm sizes trending larger
  • low interest rates
Factors to watch for price determination of farmland include:
  • amount of debt incurred
  • government policies, especially energy policies
  • input costs
  • government monetary policies as they relate to inflation and interest rates
  • commodity prices
  • weather related problems
All in all, the report shows us that farmland prices are literally going up through the roof, especially farmland capable of high yield corn and soybean crops which is largely policy-induced farmland pricing.

The above graphic shows Land Values by Iowa crop reporting districts as reported by ISU for 2010. Estimates of average dollar value per acre for high, medium, and low grade farmland on Nov. 1, 2010 by Iowa Crop Reporting District; and the Crop Reporting District average and the average percentage change from Nov 1, 2009. The estimates are based on a survey conducted by Iowa State University Extension.
source: Iowa State [pdf]

In their article, "New York Times attacks farm programs for all the wrong reasons" [pdf], University of Tennessee Ag economist researchers, Daryll Ray and Harwood Schaffer, included the strongest language that I've seen to date concerning the bubbling of farmland prices as related to government policy:
But AMTA/direct payments have affected the cost of production. As a guaranteed flow of cash, they have been incorporated into land rental rates and ultimately in the price of land. As a result, farmers have seen an increase in the cost of production directly attributable to the payments. At this point the payments are so integrated into the asset base/production system, that their abrupt removal coupled with a sudden future decline in crop prices could plunge rural areas into a freefall of land prices not seen since the 1980s. As a result there is strong resistance in the farm sector to any talk of reducing/redirecting/eliminating direct payments.
More and more, some notable voices seem to be saying "this can only end badly". One glance at the graph at the top of this article sets off alarm bells. A "bad ending" is easy to imagine for not only farmland prices, but also for the controversial Ag policies we've adopted this past decade which were put in place to raise low commodity prices resulting from grain commodity overproduction. Those policies have since caused some remarkably undesirable and unintended consequences.


  1. The parabolic slope of this line graph screams "bubble". It's just plain scary.


  2. One comment about the article by Ray and Schaffer at Univ Tenn. They don't say that elimination of the AMTA/direct payment BY ITSELF would result in a precipitous decline in land prices. In fact, the direct payment is getting to be such a small percentage of farm income that it's hardly worth keeping it. I think it would be better to make the whole payment counter-cyclical.


  3. When did we go off the gold standard? Could it be attributed to inflation? I didn't read the article to see if the chart is adjusted for inflation.

  4. Anon
    The chart above is not inflation adjusted. This next chart is, but it is for ALL U.S. farmland, not Iowa and it doesn't include 2010: http://bit.ly/gND5AE