The latest Grant’s Interest Rate Observer reports that farmers in Sioux County, Iowa bidding on a 74-acre tract forced a winning bid price of $20,000 an acre, far higher than the previous record price of $16,750 per acre set in October.
The price surge of Iowa dirt is the highest since 1977, with prices up 31% in the 3rd quarter from a year ago, and prices 7% higher from the just the previous quarter.
The price of corn at today’s $6.24 a bushel might make that price work if a 2% cash yield satifies you. But with $4 corn and a 4.5% gross cash yield, Grant’s points out that the property will fetch only $6,500 to $7,000 per are.
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I don’t follow the math. Maybe it wasn’t explained to well.
John P.
I don’t think Mr. French gives enough info for the math to work. Specifically, he doesn’t give the farmer’s production costs. So it could be the margin for the farmer between $6.24 and $4 corn could make the math right for the land price difference given an assumed 2% cash yield. Just guessing though.
See below:
Corn Price Profit Land Price $/Acre Cash Yield Bushel Cost
$6.24 4000 200,000 2% 1,645 $3.80852
$4.00 315 7000 4.50% 1,645 $3.80852
I wonder how significant the corn and other farm subsidies are affecting the price of farmland. I know that corn is subsidized in some way by the Federal government, so it makes sense that any farmland that is conducive to corn-farming should be priced higher than all farmland that is not conducive to corn-farming (all else being equal, of course).
Subsidies play a role. Iowa farmland is used almost exclusively to grow corn and soybeans (there are some wheat and forage crops, too), which are subsidized. I think the biggest factor is economic uncertainty (which, of course, is due to intervention by government, as anyone on here, even from time to time, can discover), which has driven up the prices of hard assets, like gold, silver, and farmland, via increased demand for things deemed to be “certain”.
There is a definite bubble. There is an organization called “Farmer Mac”, which (you guessed it, the government backs the loans) is similar to Fannie Mae and Freddie Mac. This is adding fuel (purchasing power) to the land purchases, causing drasticly-increased farmland values.
Joe,
there is also a bubble in agricultural land prices in Britain. So far we do not have the mandatory use of ethanol in fuel and subsidies are area based rather than production based.
Part of the bubble is undoubtedly the low yields available from other investments at present, as Doug pointed out a few weeks back in a post on Daily.
However,
I suspect that a big part, is newly printed, and newly fractional reserved money.
Let me explain my thinking;
We know about the various “QE” money printing exercises, but we aren’t seeing much in the way of increased inflation in normal consumer prices
(we are seeing some inflation, as even a stable price indicates extra money coming in, as constantly improving production methods coming on stream, and competition forcing less efficient producers out, should continuously drop prices).
Part of this lack of general inflation, appears to be banks using the new money to increase their “reserves”, and part because banks are not willing to lend money out to general consumers, or, having had their fingers burnt so recently on real estate – to property developers.
Banks are willing (over here in Europe at least), to lend for agricultural land.
Over the past couple of years we’re seeing livestock prices climb above the number of pounds sterling that they were in the late 1980s (how much of this is scarcity value because grain for fattening livestock is artificially scarce because of ethanol production, I don’t know).
As a result of higher fatstock prices, farmers here are bidding up prices of their inputs, from land, to fertiliser, to breeding critters and store critters (sheep, cattle etc, sold on by breeders for further fattening). I was speaking to an agricultural shed builder a few days back, he is very busy at present, while most of construction is in deep recession.
I agree with Dave that subsidies are playing a role here, but I suspect that “QE” counterfeit is leaking out through farmland loans and rippling out through the economy, causing mal investments and stealing the savings of the thrifty.
With 3x the money shouldn’t farm land be 3 times the price?
Not necessarily. With inflation you can’t tell where the money will pile up to cause higher prices. Things can develop a momentum of their own, where a particular industry is able to grow and sustain much higher prices due to money being concentrated in it. It takes a long time for these things to even out, and in circumstances of unpredictable inflation (like now) one cannot discount future money making the distortion more pronounced, rather than less.
Doug:
Thanks for the article/blog. Agree.
Here is my take…
Gold has to go up (way up) to get to one acre of productive farm ground. In other words…gold is undervalued, and farmland is overvalued.
Here is my leading question…
How do they freeze out farmland that is converted from this analysis? In short, folks pay $20K an acre every day for farmland, but they do that in order to put a shopping mall on it. How is this taken into account.
..great question about the effect of farm subsidies bu Joe. In short, farm subsidies are artificially supporting farm prices, which in turn artificially support support farm land prices. This was the exact same dynamic we saw with housing prices being supported by mortgage subsidies. The government can only cheat the market for so long.
Doug,
I know that new money never spreads instantly and evenly, as in the humorous “Angel Gabriel” model.
Do we know of anyone who has plotted the prices of other goods / factors of production, which, like agricultural land and gold, are very difficult to produce more of?
I do suspect that we are seeing a genuine bubble here (as the land price increases out of proportion to the incomes which can be got from farming that land), but (this is probably due to my old empiricist roots), it would be interesting to see a chart with things like food and gold prices (goods that are very slow or difficult to make more of), and increase in money supply plotted alongside to give an indication of where the base of the bubble lies on the rising tide of dodgy money.
If the purchasers of farm land are getting the same cheap real estate loans as house buyers are then the net cost of buying crop land for $20K/acre is very small.
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