Is Farmland the New Housing Bubble?

A rush for land in America’s heartland is driving up prices as institutional investors, eager speculators and well-heeled farms buy up farmland in order to shelter their wealth from Wall Street or expand their profits in the global food chain.

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Business is thriving for farm auctioneers as more and more sellers see auctions as their best way to cash in. Keen observers of the rally, auctioneers see that, though outsiders may have helped set off the investment boom, it’s farmers that are now driving it to worrying extremes.

Even as commodity prices soften, with grain prices slumping to their lowest in a year amid prospects for a bumper 2012 crop, the cost of premium U.S. agricultural land is growing at a rapid clip — as much as 3 percent a month in Iowa, where a 74-acre plot of farmland was snapped up at auction on Wednesday for a state record $20,000 an acre. The winning bid came from two local farmers.

Nebraskan auctioneer Randy Ruhter says he is seeing the same thing, but says that investors looking for a 4.5 percent to 5 percent return on their investment will be lucky to get 3 percent as land prices increase and commodity prices soften, “so it’s the farmers that are buying.”

When farmers buy land, it is usually seen as a long-term play, and they are not prone to flipping land in the way investors did in the residential real estate boom. Instead, they are likely looking to expand their operations. Industry watchers warn that such consolidation of the farming industry means that the fall of one operator would likely have far deeper ripple effects in rural America, dealing a blow to local communities, bankers, seed suppliers, and other sectors that service their needs.

Rising farmland prices are ominously reminiscent of the housing bubble of the 2000s, and though farmers do not yet appear to be loading up on costly debt, a rise in input costs coupled with forecasts of commodity prices tumbling early next year could result in a wave of farmland financial woes. Another worry is that farmers will use tax strategies to delay paying income tax, a potential problem should the commodity world sour.

Auctioneers helped drive a 25 percent jump in land values last quarter even though some say they know the rally is unsustainable. And while they don’t see a collapse coming, they say a correction is inevitable. But in the meantime, hunger among farmers has prompted more sellers to put their land up for public bidding to see what they can get in a sale.

This sort of farm boom is by no means unprecedented. Parallels to the past are impossible to ignore, and similar 20th century farm booms were followed by devastating rural depressions. However, current interest rates are far lower, and farmers are sitting on piles of cash.

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