Home values continue to fall in Minnesota, but the value of farmland has rapidly grown, spurred by very profitable grain prices. Vigorous debate abounds over whether agricultural land is another real estate bubble waiting to be burst.
People at the highest reaches of economic policy-making are sounding alarms over a potential farmland price bubble.
Earlier this year, the now-retired President of the Kansas City Federal Reserve Bank, Thomas Hoenig, complained about the Fed's current zero interest rate policy. Cheap money artificially boosted farmland values in his home district, Hoenig said. "Fertile farmland was selling for $6,000 an acre just two years ago," Hoenig said. "That land today is selling for as much as $12,000 an acre."
Hoenig predicts when current low interest rates reverse course and trend higher, land values will drop dramatically. He recalls from the 1980s what happens when a land price bubble bursts.
"In the Federal Reserve Bank of Kansas City's district alone, I was involved in the closing of nearly 350 regional and community banks," Hoenig said. "Farms were lost, communities were devastated."
In the 1980s, land values reached record levels before falling by more than half, crushing rural America. There's concern it could happen again as farmland prices continue to rise — up at least 20 percent in Minnesota over the past year.
RECORD GRAIN PRICE ENABLES LAND PURCHASE
"We have $7,850, anybody give me $7,900?" an auctioneer says.
At a recent land auction in southwest Minnesota, an auctioneer asks for a bid of $7,900 per acre. But the previous bid of $7,850 was too high for anyone to top.
"At 79 going once, 79 going twice, and I sold the farm 7850," said the auctioneer.
Even though the farmers in the audience anticipated this sort of price, several shook their heads in amazement anyway. Declining to speak on record, some wondered privately if the new owner can break even after paying a price for land that had been unheard of not long ago. Even the seller was surprised at the sale price.
"It's crazy what farmland is going for," said Luing.
Ken Luing sold the land in partnership with a sister and a sister-in-law. He wished the new owner luck at making a profit.
"I would think it would be awful hard," Luing said. "Corn and bean price better stay up there."
Although grain prices have fallen in the last two months, they have been at near-record levels for much of the year. To some analysts, that lets the air out of the bubble argument. Purdue University Agricultural Economist Chris Hurt said highly profitable grain prices and record low interest rates give farmers plenty of financial leeway to bid up land prices and remain in the black.
"You can go back to the basic fundamentals and say that, land today, given returns and given those low interest rates, is not overpriced," Hurt said.
Depending on a farmer's net worth, even paying $10,000 an acre can make economic sense, Hurt said. But that accounts only using current grain prices and current interest rates. What if things change? The good times farmers are using today to bid up land prices are not likely to last forever, Hurt said.
"There've been a lot more of those years where we've seen very tight margins to make money on the farm," Hurt said. "Then we've seen the flush times like we've seen the last few years."
However, there are powerful factors which could keep grain prices high, Hurt said. The ethanol industry uses about 40 percent of the domestic corn crop, and that strong demand is likely to continue. Also, China buys large quantities of soybeans, boosting profits there.
Despite the prospects of sustained strength in the grain market, buying land at today's elevated prices is a risky venture for most farmers. There are many factors to consider in calculating how much to pay.
Southwest Minnesota farmer Gene Stoel is working the numbers right now because he'd like to buy some more land.
"At first glance, you look at it and you say 'Man I don't think we can ever sustain those kind of land prices,' " Stoel said. "But everybody has to figure out for themselves what they can afford."
And that financial equation can include some things on which are tough to put a dollar value. Stoel would like to bring his son into his farm operation. To do that, they need to buy land.