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April 24, 2014

Will Farmland Values Reverse Course?

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Will Farmland Values Reverse Course?

Farmland values have risen rapidly over the past few years, renewing fears of a bursting bubble in that sector.

In Iowa alone, farmland values have surged 90 percent since 2009. Mike Duffy, an economist at Iowa State University, says that an acre of farmland in the state used to sell for an average of $2,275 about a decade ago. Today, it sells for $8,700. Last October, an 80-acre parcel of farmland near Boyden sold for a record $21,900 per acre. 

But some analysts say the increase in land values are not sustainable. 

"The concern clearly is not so much how much higher are they going to go, but when this bubble breaks, how low will they go and what will the aftermath of that be?" Michael Hein, vice president of the Liberty Trust and Savings Bank in Durant, Iowa, told USA Today. "If profits start to diminish, there will be an impact on land values as well." 

In the early 1980s, a  a surge in interest rates, and a drop in crop prices led to a rapid decline in farm prices. Many farmers — who had financed their purchases with debt — were forced to unload their properties. It caused a sharp decline in farmland values, which dropped 63 percent in Iowa, going from $2,147 an acre in 1981 to $787 five years later. 

But some analysts say that won’t happen again. Farmers are more financially conservative, with many of the recent land purchases being made with farmers using 50 percent to 75 percent of their own cash, USA Today reports. The debt-to-asset ratio on farms is expected to be the lowest level on record this year, according to the U.S. Department of Agriculture.  

Still, some banks like Liberty Trust and Savings are reportedly becoming more cautious in issuing new loans for farmland, as values start to show some decline. 

Source: “Farmland prices: Is the bubble about to burst?” USA Today (March 24, 2013)

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Economists Fear Farmland Bubble