Farmland price bubble will burst

American humorist Will Rogers once cracked that Americans are the only people in the world to drive themselves to the poor house. That observation, made at the height of the Great Depression, remains accurate today.
Regardless of our personal or national finances, we will never give up our $3-a-gallon lifestyle. While this American birthright – E Pluribus Hummer? – carries many geopolitical consequences, there’s no doubt of its effect on land prices.
On fire. Farm and ranch land prices, lit by near-atomic forecasts of a farm-based, biofuel future, caught fire in 2007. Pick any spot in any state and the chances are 100 percent that its land prices are up at least 10 percent in 2007, according to data compiled by Federal Reserve district banks.
Prices for “good” Iowa farmland, according to the Chicago Fed, rose anywhere from 13 percent in the state’s south central region to 22 percent in north central region from July 2006 through July 2007.
Nonirrigated farmland values in the High Plains, reported the Kansas City Fed this summer, rose 13.8 percent in the past year while ranchland values climbed 13.5 percent. And, oh, irrigated land climbed, too; up 13 percent.
South of the Plains, the land market was even hotter. The price for ranchland in the Fed’s 11th District – Texas and pieces of New Mexico and Louisiana – shot up 18.2 percent from mid-2006 to mid-2007. Nonirrigated farmland prices rose 13.4 percent over the same period and irrigated farmland climbed 13.7 percent.
Similarly, the Minneapolis Fed reported prices for nonirrigated farm and ranch land across its North Dakota-to-Michigan region gained 17 percent and 16 percent, respectively, in the latter half of 2006 and first half of 2007.
Drivers. Most of these gains have the same, two, intertwined drivers: $100-a-barrel crude oil and an American ethanol industry that will liquefy as much corn, about 2.3 billion bushels in 2007-2008, as the nation will export.
The thirst for fuel has led farmers, ranchers, market forecasters and commodity prices into areas no one has ever been.
A year ago, would any sane farmer, rancher or market seer have predicted $3.70 per bushel November cash corn after binning a record-demolishing 13.3 billion bushel crop in October?
Sane, no; intoxicated, probably.
Moreover, if you would have had to be tipsy to foresee today’s nosebleed-high cash corn despite 2007’s record crop, just how much Kool-Aid must you drink now to think today’s record land prices will continue their rocket ride?
If your drink of choice is ethanol, not much, said Bruce Babcock, an economist and director of Iowa State University’s Center for Agricultural and Rural Development. Babcock estimates that 50 percent to 70 percent of the fire under land prices is biofuels.
And it’s not just land devoted to ethanol-ticketed corn.
“Higher corn prices are certainly the key element of today’s higher land prices,” he noted, “but look at soybean prices and wheat prices, too. Both are substantially higher because the global market is fighting for grain acres of all kinds and will continue to do so for a while.”
Obituary. In a Nov. 28, front-page story, however, the Wall Street Journal all but announced the death of biofuels.
“Ethanol Craze Cools As Doubts Multiply,” reads the headline of the obituary in the newspaper that, famously, failed to foresee the 1987 stock market crash, the dot com bust of 2000 and the great mortgage meltdown of 2007.
So, will land prices – with or without the Journal’s reporting – continue to rise?
I have no idea, but I suspect Will Rogers’ insight remains accurate; no matter what, we will be driving to the poor house.
In my case, I’ll be toting the lovely Catherine’s sterling silver flatware, also.
(Alan Guebert’s Farm and Food File is published weekly in more than 75 newspapers in North America. He can be contacted at agcomm@sbcglobal.net.)