A reduction in land prices stirs thoughts of a bursting bubble

A report by agrimoney.com show that farm land values have seen their first decline in nearly 5 years falling 1% in the first quarter of 2014.  The decline was triggered by a substantial drop in grain prices at the end of 2013.  In the south central plains, dryland prices declined 1.4% while irrigated crop ground increased at a modest 4.3%.   In the corn-belt states such as Illinois and Indianan, price dropped by 4%.Tractor

At the same time, pasture land values have increased.  Falling feed grain prices which have spurred the slowdown in crop land values have conversely improved profit margins for the cattle industry increasing the value of the product produced on pasture ground.

Pasture

The questions on most farmers, ranchers, lenders, and economists minds during the recent run-up in land prices are: How high will land prices go, and will there be a bust similar to the 1980’s?  Some economists believe that an agricultural land bust similar to the 1980’s will not happen.  They cite crop insurance programs, who do a better job stabilizing revenue, as one reason such that lean years today won’t be as lean as years past.  The other main reason is that the level of indebtedness has been reduced by farmers. Current reports show that, in aggregate, farms are not has highly leveraged today as in the 1980’s and the average farm has a higher buffer for times of financial hardship.

A repot by Allen Featherstone at Kansas State University acknowledges that farms in Kansas had an average debt to asset ratio much lower than in 1979.  However, Featherstone points out that there is a higher percentage of farms in Kansas with a debt-to-asset ratio greater than 70% today than during the 1980’s bubble. The fact that more farms are highly leveraged today than before is critical according to the report since defaults typically occur within this group.  Featherstone also points out that the bubble of the 1980’s was started by a significant drop in the value of farmland production over a two year period, and that a similar drop today over a similar period of time would not be substantially mitigated by price/revenue supports.  Therefore, Featherstone concludes that it will not be leverage that will begin a bust cycle for land, but may increase the problem.