Even with farm incomes down, farmland values are rocketing higher. In fact, in a few months when the statistics are finally available, don't be surprised if Midwestern farm real estate values have taken one of the biggest jumps to the upside in any one year since the boom of the 1970s.
What's driving prices? A year ago the answer was simple — big LDP payments. But for the most part, there are no LDP payments this year and many farmers are short of cash because of the lack of government payments and/or lack of a crop.
So what's the driving force this year? Basically, there are three groups driving prices higher.
First and foremost, we have met the enemy and the enemy is us (farmers). Farmers always have been and most likely always will be the largest buyers of farmland.
The second group is comprised of investors looking for a tax-free rollover. It possibly may include someone who sold an apartment building or commercial warehouse and has made the decision to roll profits tax-free into farmland.
An even bigger part of this group, however, is again farmers. Producers within large metro areas are seeing their farmland gobbled up by developers and then need to roll those profits into additional farmland. For example, farmland in the Chicago metro area can peg $25,000-100,000/acre. If a producer sells 200 acres at $25,000/acre, his No. 1 option is to look for another farm away from Chicago. He then must be willing to bid higher for farmland than individual farmers living in the outer areas.
The third group driving farmland prices up is investors in the stock market, who after three years of losses have finally concluded that a diversified portfolio might make more sense.
This worries me. When this group decides it's time to get into farmland, and I can remember when it happened in the late 1970s, it's a sign that we're nearing a temporary or long-term top. The timing of the average investor for buying farmland does not carry a stellar track record with it.
How Long Can This Last?
First, let me make this loud and clear — I am not bearish on farmland prices. I am, however, concerned that the current spike-up may not last. It's also possible that land prices in the next 12 months may not only stabilize, but come back to where they were three or four months ago. My reasoning that this could be a short-term bubble:
The tax-free exchanges that result from developers buying farmland rely almost solely on low interest rates. Developers are able to buy land and finance it at very low rates. At the same time, they're able to sell lots for housing to individual homeowners. Add two percentage points to the prime lending rate and that ball game will come to a screeching halt.
The individuals rolling out of the stock market and into farmland right now are typically short-term investors. They're not in for the long haul like most producers. Stabilize the economy and let the stock market start to show some gains and that money will leave agriculture just as fast as it came in.
Should I Buy Land?
When purchasing farmland, ask yourself:
Am I buying this for the long or short term?
If I buy the land, can I afford one or two bad crop years, or more simply, one or two bad income years?
Does buying farmland fit in my long-term business goals? Would I be better off investing elsewhere? (There are investments other than farmland.) Would I be happier farming less land with less stress?
Does buying the land make good, sound business sense or is the land being bought to satisfy my ego? (I'll let you think about that one.)
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.