The NY Times describes how the increasing prices of crops has allowed farmers to increase farm acreage into previously unthinkable plots. Marginal land is now productive land with the high prices available for crops.
“Across much of the Midwest the sharp increase in farm earnings has driven the price of farmland to previously unimaginable — and, some say, unsustainable — levels. But in the process, to much less fanfare, the financial rewards have also encouraged farmers to put ever more land into production, including parcels that until recently were too small or too poor in quality to warrant a second glance…
…farmers, flush from the most profitable years in decades and looking for better places to store money than low-interest savings accounts or a turbulent stock market, are putting their money in land.”
According to an Iowa State study, farmland in Iowa increased 32% last year to $6,700 per acre.
See “As Crop Prices Soar, Iowa Farms Add Acreage” for more details.
(Hat tip to a friend who pointed me to this article)
Under Alan Greenspan, the Federal Reserve was known to stand on the sidelines while bubbles in asset prices grew and grew. Greenspan had a lot more faith in the Federal Reserve’s ability to mop up the subsequent mess caused by a bubble’s collapse than in its ability to stop a bubble, much less identify one.
It seems times have changed. On October 13, Businessweek chronicled the Fed’s efforts to make sure that soaring prices in agricultural land do not lead to another messy bubble and economic calamity. Prices have indeed soared across the midwestern United States:
“The Kansas City Fed reported land values were 20 percent higher than a year ago. The Chicago Fed reported a 17 percent increase in its district, the fastest increase since the 1970s. Nonirrigated farmland in the Minneapolis Fed district increased 22 percent in price.”
The factors driving these increases are the same as I reported from a related Planet Money piece: “Land prices have doubled in Iowa over the past few years“: “elevated crop prices, soaring farm income, and record-low interest rates.”
As a result, nervous regulators are demanding rigorous stress tests of banks up to their gills in agricultural loans. Businessweek also reports that regulators are “…scrutinizing the lending standards, loan documentation, and risk management at the country’s 2,144 agriculture banks.”
I will be very interested in the outcome of all this scrutiny. The same Federal Reserve that helped create record low interest rates is working to ameliorate the impact of those very same interest rates. This episode is a reminder that flooding an economy with liquidity does not produce equal outcomes for all sectors. Recovery and prosperity does not even need to appear in the sectors most impacted by the malaise the Federal Reserve scrambles to repair. Instead, the money tends to collect where it will generate the highest returns due to other economic factors. Currently, it seems that the bet is on farming. I believe the Federal Reserve was aiming for housing…
Land prices have doubled in Iowa over the past few years. The team at Planet Money conclude that the land boom throughout the agricultural U.S. Midwest is being driven by “real” economic forces. They identify low interest rates, grain traders, and government subsidies for ethanol as key drivers of this boom. Low interest rates are enabling land purchases. Grain traders and the demand for ethanol are driving up corn prices which in turn make land for growing corn more dear. Starting with auctions in Iowa, Planet Money takes us to a part of the country that is booming while much of the rest of the country is stagnating.
Finally, one “seasoned farmer” warns that this boom is indeed a bubble and points to the crash in land prices in the 1980s after a similar period of exuberance.
Listen to “The Tuesday Podcast: The Land Boom“