The price of farmland in the Upper Midwest begins the new year at record levels, with no sign of a peak yet. High grain prices are giving farmers lots of cash and they're spending it on their favorite asset.
Land prices are going up in part because of farmers like Larry Vandyke. The southwest Minnesota farmer wants to keep his family in agriculture for a long time. His son wants to farm but right now Vandyke doesn't have enough land to support both himself and his son. So last summer he bought a convenient parcel of 80 acres.
"We basically wanted it just because it's so close proximity to the other property we own," Vandyke said. "The opportunity finally come up so we bought it."
Vandyke paid $5,700 an acre for the land, so the total bill was almost half a million dollars. But Vandyke said that almost seems like a bargain now. That's because buyers continue to bid up land prices.
At a recent auction attended by about 50 farmers in southwest Minnesota, land sold for almost $6,000 an acre. Some auctions have brought even more -- a lot more.
Two separate auctions last year in Rock County show just how strong the surge in farm land prices has been, said Bill Weber, a farm management consultant in Luverne, in southwest Minnesota.
"A quarter section sold for $8,000 an acre," Weber said. "And in January a quarter directly across the road from this parcel had sold for $5,500 an acre."
That's a 45 percent increase in just 11 months.
The main reason for the farmland boom is a sharp increase in grain prices, said Brian Briggeman, an economist with the Federal Reserve Bank's office in Omaha. Corn prices have doubled in the last year, with most of that gain coming in the last six months.
"Farmers have ample cash," Briggeman said, "and they're looking to put it to work."
Briggeman said the booming farm economy delivered double digit farmland price increases to many states during 2010.
In Minnesota, the Federal Reserve estimated prices increased an average of 12 percent through the end of September, the most recent data available. The rapid increase has caught the attention of some of the nation's top financial watchdogs, among them Sheila Bair, chairman of the Federal Deposit Insurance Corporation.
"Where might asset bubbles be forming today?," Bair asked at a Baltimore meeting last fall.
Bair said farmland prices, up nearly 60 percent in the last decade, are near the top of her possible bubble list.
The FDIC is charged with maintaining stability and public confidence in the nation's financial system. Bair said the nation has gone through a housing bubble and a stock market bubble in the last decade and can't afford another one.
The problem with bubbles is that when they burst, they leave many investors owing more money than they can pay.
Bair said 25 years ago a farmland price bubble did burst, bankrupting many farmers, banks and other agricultural businesses.
"A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks," she said. "This is a situation that will continue to require close monitoring."
Bair makes a good point, said Vandyke, the southwest Minnesota farmer. Although the farm economy is strong, he said, that could change. When it does, the land fever will cool, and prices will drop.
"I don't know if we'll see a bubble burst or not," Vandyke said. "But it can certainly stand a 25 percent correction I would think."
Vandyke said most farmers have enough of a financial cushion right now to absorb that sort of downturn. If the land price drop though is more severe, it could trigger unsettling flashbacks to an agricultural crisis farmers hope they never see again.