Another Bubble Pops: Price Of Farmland Suffers First Annual Decline Since 1986

Tyler Durden's picture

One of the bigger asset bubbles in recent US history has nothing to do with stock, bonds or commodities, and unlike the real estate bust of 2007 (which has since rebounded only for the ultra-luxury segment), barely batted an eyelid during the Great Financial Crisis. Curiously, it was not until early this decade that the institutional money even noticed said bubble, something he discussed in October of 2010 when we profiled TIAA-CREF's investment in this particular asset class. We are talking of course about farmland.

And yet, like all other bubbles - be they the result of retail euphoria or central bank rigging - this one too must come to a close, and as the WSJ reports, the first crack in the farmland bubble are appearing, after farmland values declined in parts of the Midwest for the first time in decades last year "reflecting a cooling in the market driven by two years of bumper crops and sharply lower grain prices, according to Federal Reserve reports on Thursday."

 

Putting this in context, the average price of farmland in the Federal Reserve Bank of Chicago’s district, which includes Illinois, Iowa and other big farm states, fell 3% in 2014, marking the first annual decline since 1986, which makes farmlands the only asset class that had not seen a down year in nearly three decades!

 Prices for cropland during the fourth quarter remained steady compared with the previous quarter, according to the bank’s survey of agricultural lenders, though half of all respondents said they expect farmland values to decline further in the current quarter.

Demonstrating the robustness of farms as an asset class, the price decline was sporadic and not pervasive: "in the St. Louis Fed’s district, which includes parts of Illinois, Kentucky and Arkansas, prices for “quality” farmland gained 0.8% in the fourth quarter compared with year-ago levels, despite lower crop prices and farm incomes in the region. A majority of lenders in the district expect values to cool in the current quarter compared with the first quarter of last year, reflecting reduced demand for land amid tighter profit margins for farmers."

Still, the sudden bout of commodity deflation that spooked markets in late 2014 and which the permabulls are calibrating on a daily basis to determine if lower or higher oil prices are bad or good for the economy, is being felt not only across the entire commodity supply chain, most notably in China and the BRICs, but across the US farmland sector. According to the WSJ, the reports "spotlight an overall slowdown in the U.S. farm economy and in the appreciation of farmland prices. Crop prices had soared for much of the past decade, fueled by drought and rising demand for corn from ethanol processors and foreign importers. The gains pushed agricultural land values so high that some analysts warned of a bubble."

And like any burst bubble, it is likely to only get worse as price discovery to the downside accelerate: on Tuesday, the U.S. Department of Agriculture projected net U.S. farm income this year would fall to $73.6 billion, the lowest since 2009, from $108 billion in 2014.

Not helping is a crop season that has been far better than was expected due to "flawless weather" over the growing season, leading to the largest ever US crop by value, leading to a crash in the prices of corn which have tumbled more than 50% since the summer of 2012, when they soared to record highs amid a severe U.S. drought. 

As a result, farmland values in corn-producing states are the first to go:

In the Chicago Fed district, farmland values in the latest quarter dropped in major corn-producing states like Illinois, Iowa and Indiana compared with year-ago levels, while land values in Wisconsin increased slightly and were unchanged in Michigan. The fourth quarter of 2014 marked the first time since the third quarter of 2009 that cropland values in the district dropped overall compared with a year earlier.

 

“Lower corn and soybean prices have been primary factors contributing to the drop in farmland values,” David Oppedahl, senior business economist at the Chicago Fed, wrote in Thursday’s report, adding that for 2015, “district farmland values seem to be headed lower.”

What will exacerbates the situation is that like with the US shale patch, farmers are clamping down on expenditures in hopes of preserving cash flow: the St. Louis Fed said farm income, household spending by farms and expenditures on farm equipment declined in its region. Midwestern bankers expect a continued slowdown in the current quarter in those three categories.

“It is very difficult for farmers to buy farmland and new equipment with corn prices in the $3.50 range,” said one Missouri lender in the St. Louis Fed report.

What is worst, is that while the junk bond funded shale boom, which judging by the record rig closures, is well in the bust phase, the next industry that may see a dramatic surge in indebtedness is none other than America's food belt:

Bankers in the Midwest also noted a rise in financial strain for crop farmers in the latest quarter. Lenders in the Chicago region reported a dramatic increase in demand for farm loans compared with year-ago levels, with an index of loan-demand reaching the highest level since 1994. Farm loan repayment rates also were “much weaker,” in the fourth quarter of 2014 compared with the same period a year earlier, the bank said, with an index of loan-repayment falling to the lowest level since 2002.

In short: US farming may be on the verge, if not already in, a recession.

That's bad; what's worse is that banks, full to the gills with fungible excess reserves, will be delighted to provide vulture capital to farmers desperately in need of capital in the coming years. Why? Because as is widely known, the "money" is really created in computers, either the Fed's or banks', out of thin air. Money, which will be promptly collateralized by arable, rich farmland.

And should the industry fail to recover if the mega-commodity bubble of years gone by is unable to reflate? Well, guess who will be the proud owner of America's vast and rich farming heartland? Answer: the same people that quietly over the past few years also became America's largest landlord.

And with that, the great asset transfer from everyone to the wealthiest 0.1% will be almost complete...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Uber Vandal's picture

Wow, 1986 seems to be a record year of sorts.....

http://www.zerohedge.com/news/2015-02-02/baltic-dry-plunges-fastest-pace...

Never mind that, we already blew past that record low......

What happened in 1987 again?

CrazyCooter's picture

So if my goal is to work until I die at which point I will still have a flushing shitter, three hots a day (if I can use that many calories), and sleep in a warm bed ... and I leave chips on the table when I go ... what am I missing?

People trying to trade and "make money" are missing the boat.

Just find something you like to do, don't get run over, and enjoy the ride.

Regards,

Cooter

Uber Vandal's picture

Yes, there are things FAR more important in life than money.

The bigger problem is that damn near everything is driven by money, or numbers at the least.

Everyone knows the PRICE, few know the VALUE.

 

 

A Nanny Moose's picture

not driven by money, but goal seeking...of infinite growth.

 

Shit...we dont' even use money. We use fiatscos

kaiserhoff's picture

This is just the beginning.  Only 2% of Illinois farm land changes ownership each year, so as the article states, price discovery takes a while, especially when prices are down.  I don't like the GMO seeds for many reasons, but those yields have made grain farming a lot harder.  I would expect a long over due return to smaller, more efficient farms, with some live stock.

March is the traditional time for signing new land rental contracts.  That will show the real damage.

mvsjcl's picture

I thought that they already owned the land, that we were merely "renters" who had to pay yearly (taxes) rent on the property or else face eviction.

Gaius Frakkin' Baltar's picture

Bankers and bureaucrats have been the controlling interests in farming since at least the Great Depression. Nothing changes until we all realize most of the 20th century was shit covered in icing.

Search "get big or get out"

Hope Copy's picture

Wrong.. legally rental prices have to be set by the end of October.  Much of Illinois and the surrounding states have many smaller tracts in the hands of the bankers in form of trusts.  Farmers, if they have managed their finances properly and avoided the occasional disaster are farming up to 2000-3000 acres  (800-1000 hectares) as grain operations in family corperate form with the head getting over $300k anually.  These farms employ 3-4 induviduals (usually family members) full time and and additional part time labor that usually are at the median income level or below.  Cattle and dairly employ slightly more.  One must also reconize that the on farm write offs include all housing, most transportation and some food costs.  Such operations usually have land, building and equipment values of over $25-$40M with much of the make up of the farmland share crop or cash lease.  Top Illinois farmland leases in Illinois where over $400/acre and have recently contracted 10%.  CME futures have been heavily factored into the considrations along with yeilds that have been consistantly well over 2oo bu/acre for maize with a nominal rotation into soybeans every 4 years.  [This is not speclation.]

new game's picture

not to mention water under the land. a million staws sucking the aquafirs dry.

humans-terminal 

doom of a species by natural secection.

terminal. inevitable

good news is some will survive

tic toc

kaiserhoff's picture

All you have to do to find water in the Midwest is punch a hole in the ground.  The water table is at 15-20 feet on Mule Creek and Muddy Creek.  Forty inches of rain each year, and floods to some extent almost every Spring.

We need a pipeline to those dry old farts in Arizona;)

new game's picture

big pic, i owned 40 acres and the water table would rise to the surface each spring. not crop land though. thinking cali, nebraska, basically rain dependent crop land where we irregate when nature doesn't provide. and these are vast tracts of cropland. cue water drilling. booming business in cali. just sayin.

oldmanofthesee's picture

Yeah, until you try to buy some. Farm land prices low and dropping, grain prices at multi-year lows, nothing a good drought won't fix.

Redneck Hippy's picture

We just need to legalize marijuana in the Midwest.  Quite a bit higher price per bushel than corn.

Kayman's picture

Like everything that government wants in on-legalizing marijuana will effectively become confiscation of the industry with government cronies doing the growing.

 Remember when the only lottery available was the Irish Sweepstakes - now government has monopolized lotteries.

sun tzu's picture

Prices will crash when it is legalized. The law enforcement industrial complex won't let it happen. There's too much money to be made arresting people, holding trials, putting them in prison etc. Think of all the law enforcers, judges, lawyers etc that will be out of high paying jobs if narcotics were legalized.

A Lunatic's picture

Nothing hurts farmers more than cheap oil.......

Thirtyseven's picture

Talked to a friend on the phone for about an hour and a half today (long, I know, but we were catching up) and he mentioned oil prices and "recovery"  I stopped him in his tracks....

It's amazing how that word (recovery) has invaded our language.  It's the new narrative.  "Recovery" no longer means healing or mending, recovery now means: higher costs.

Oil "recovery": pay more for your irreplenishable fossil fuels!

Housing "recovery": pay more for these stix & brix!

What's next, a "recovery" at the grocery store?!?!

new game's picture

just speeds the process

doomers unite!

TheReplacement's picture

rejected posh push sets

dyslexics untie!

NickVegas's picture

Control of the language controls the debate controls the mind. Control, resistance is futile.

sun tzu's picture

Good news, food and energy prices are headed up again!!! Everybody rejoice.

Soul Glow's picture

Jim Rogers advice isn't panning out very well.

ThroxxOfVron's picture

Bullshit.

Jim Rogers advice was damned good advice for the last several years and for several years before that.

IF you bought without going into debt you are miles ahead of the game and can either:

A. Get out now at the first sign of downturn and cash in your chips.

B. Buy more while it's on sale: scoop up assets from levered players that got in late and/or at too high prices and are about to be shaken out.

Somebody has to put food on the tables and most prices haven't fallen much from highs.  Traditional median prices are what you've gotta look at.  Debt loads will destroy any biz that levers up too much...

Cali/West US is probably gonna still be in a drought come season and will be worthless.  GMO and fertilizer problems aside: the mid-west is still the breadbasket and although it's a hard row to hoe they aren't making any more cropland...

 

Mitch Comestein's picture

Well...they can till new cropland.  It just takes money/time to make it fertal.

new game's picture

rodgers is bowtied fuckhead, same with the pony tailed swissy...

kaiserhoff's picture

There's plenty of fallow farm land on the east coast.  No need to clear anything.

Go for it honcho, and let us know how rich you get.

(I think you meant fertile, unless you are talking about fertal Myrtle.)

Mitch Comestein's picture

honcho....okay.  You give me the money and replace my wage and I will go do it.  I will require a contract.  BTW, I am thinking pasture to convert.  It is there.  However, if you look at my original post it stated that to do this it would require......money/time.  

 

Do you think the settlers found the land ready to plant.

Save_America1st's picture

well, it's all about timing and it also depends on an individual's allocation of their own personal financial resources.  Everybody has a different financial situation and their own way of using those finances to their advantage if they're awake and trying to prepare the best they can for the collapse...some who ran out there and bought farm land at the highs and didn't have anything left to buy all this silver at these lows may be in a regretfully bad situation.  Those who bought phyzz silver at the highs when farm land was still low may be pissed that they made the wrong move at the wrong time.  It's different for everybody depending on their personal situation, needs, wants, preferences, etc. etc. etc.

I certainly hope those land values will fall back down to my personal comfort level...that's what I've been waiting for while I've been stacking some cheap phyzz.  Those who have waited for the inverse to evenually occur between phyzz and land and who have built up big stacks of phyzz silver will hopefully be able to buy massive amounts of prime land on the cheap at some point in time.  Just gotta hope to time it right and maybe get lucky too.  Be diligent and always searching and researching for an advantage.

Hopefully the massive authoritarian tyranny of the MIC and the gov-scum NWO sociopath mutants who are hell bent on destroying this world won't come crashing down on us first. 

Abitdodgie's picture

You do not buy land you only rent it from the state you are in , try not paying the property tax and see what happen's .

Government needs you to pay taxes's picture

This is accurate unless and until you become ready, willing, and able to defend that land. . .  When the State comes, they can demand your gold, your land, or your family.  Land is safer, in my view, b/c it can't be moved AFTER it is confiscated.  That makes it an asymmetric risk scenario.  The State would have to put and keep boots on your ground to keep you from reclaiming it.  That gets really expensive.

Beowulf55's picture

I like your idea but it will not work, unless you own your own nuclear weapon........they have something called a Sheriffs auction where your land is sold to some other sheeple farmer.  Now you have to shot that farmer to reclaim the land.  Then things really go down hill fast......

 

 

green888's picture

you cannot farm without the general agreement of the local population. Big areas to police, only a matter of time before it grinds to a halt as few can afford 24/7 surveillance  

sun tzu's picture

Farm and ranch land have an ag exemption in many states. It lowers the property taxes to pennies on the dollar plus you grow or raise your own food instead of buying GMO from Monsanto

Beowulf55's picture

Not in Kansas.....I would like a list of those states that farmland is exempt from property taxes......does this include the house you live in on the farm?

GMadScientist's picture

None of that Markov walk will matter one whit if you've got food on your table 10 years from now.

noben's picture
noben (not verified) Soul Glow Feb 14, 2015 1:52 AM

You should buy it on the way down.
The way we were encouraged to buy Gold on its long slide from 1800 to 1200.

It's always a good time to buy (RE, stocks, PM).

fattail's picture

Jim Rogers gave that advice in 2004.  If you just woke up or learned to read then yes, it looks like you missed the party.  Unfortunately we add 80 million mouths to the planet every year and the amount of annual ag production in bushels or metric tons, not fiat paper, is skewed higher by the copious amounts of petroleum based fertilizer, genetic engineering, and aquifer based irrigation.  Irrigated agriculture production is the single factor allowing the marginal excess food production to keep prices affordable for the third world.  This party is not over.

http://www.earthpolicy.org/books/fpep/fpepch6

 

BTW - There will be a shooting war in Asia for clean water. 

bluskyes's picture

Demand for the majority of crops produced is generated by bio-fuel, and ethanol requirements.

Fiat Burner's picture

What I find ironic about Jim Rogers is that he always harped on the fact that "Gold went up for 12 years in a row" and didn't recommend buying it.  Yet, US farmland went up for 30 years in a row and he still recommended it?

European American's picture

Who wants toxic, contaminated, gmo infected land to grow sick food on? Even the farmers are finally realizing that now. The land is not happy, and neither is Mother Nature.

 

As you grow, so shall you weep.

Bumbu Sauce's picture

GMO infected land to grow sick food on?

 

ROFL.  You are fucking clueless. 

El Vaquero's picture

How about this:  Large scale monoculture farming that depends heavily on petrochemicals and natural gas based fertilizer where the soil is lacking in biodiversity and is unsustainable without those petrochemicals and natural gas based fertilizers.  It is telling that the nutritional content of some of our crops has fallen from 50 or 60 years ago for various reasons

 

The problem with agriculture today is that we try to outright control nature.  That will only work for so long, then we'll pay the price when we can no longer do so.  .

new game's picture

soil is dead w/o constant input of petro chemical. no mico organisms. done deal, just the demise.

7.2 billion to the edge of the cliff. what part of finite don't you down voters understand.

oh, yea read your fucking bible. multiply and spread the word, ha...

GnomeAlone's picture

Just unleash the powers of creation! We can have abundance!

https://www.youtube.com/watch?v=K1rKDXuZ8C0

 

TheReplacement's picture

I do not think the bible says anything about manipulating nature and all the other destructive things we do to the earth.  In a simple agrarian society, multiply and prosper (it doesn't say indefinitely btw) works.  It is when you start covering farmland with giant cities that things start going sideways.

Edit:  Put it another way, remove all the Babylons and things get right with nature very quickly.

ThroxxOfVron's picture

"  It is when you start covering farmland with giant cities that things start going sideways. "

^^^THIS^^^ cannot be overstated.

Greater NYC and sprawling Cairo have devoured and destroyed two of the most fertile estuary zones on the planet.  

These resources have been pointlessly disasterously squandered.  

How many billions would it take to reverse: to move the people out and tear the infrastructure and contaminants off of the rich former farmlands of Queens and Brooklyn??  Urbanization and pollution have paved and poisoned what were once and should presently be major regional breadbaskets.

Augustus's picture

Lots of the ZH crowd knows absolutely nothing about actually producing something other than electronic digits and drool.  Regular stupid horse manure comments on oil and gas production, fracking, global warming and affirmative belief in UFO aliens.

Notice in the article that the price of highly quality land has continued to increase.  It is the hobby farmer or sundown farmer land that has declined.  Much of that land is sold to someone building a house in the country that wants some space.  Quality of land and productivity has little to do with the choice.  The headline is misleading, but who would consider a 3% decline to be bursting a bubble in the first place.

 

spooz's picture

The article is talking about cropland, not hobby farms.  Lower corn and soybean prices led the US Dept of Agriculture to project that farm income would fall to $73.6 billion, the lowest since 2009, from $108 billion in 2014.  THAT is what is leading to the drop in cropland prices. And the drop is more than 3% in the Corn Belt:

"The value of farmland in the Corn Belt is dipping. In Iowa value dropped 7 percent last year. 

The drop can be attributed to the record-breaking crops produced by corn and soybean farmers in 2014. The massive supply meant a big drop in commodity prices and that has caused a decline in the value of farmland used to grow corn, according to the Federal Reserve Banks in Chicago and Kansas City.

For the upper Corn Belt, from Iowa to Michigan, it’s the first decline in almost 30 years. Todd Kuethe, from the TIAA-CREF Center for Farmland Values at University of Illinois, says farmland prices follow the path of commodities prices and farm income.

"Farmland prices are like a glacier," Kuethe says. "They do move, but they move very slowly, and it takes a really sustained to move them.

Kuethe says in the next couple years, the overall decline in the Corn Belt’s farmland value could see an additional drop of 5 to 10 percent."

Hobby farms value is as much or more in the buildings, pastures and gardens as in the limited amount of cropland, and most aren't even operated as businesses.

cnmcdee's picture

Kind like the Mel Gibson Movie

 -" Too much sun or Too much Rain or Too much corn, I can wait... "