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Falling Farm Prices: A Call for Pause, Not Panic

December 18, 2013 By Lee Egerstrom, Economic Development Fellow

Warnings that a farmland bubble may be bursting have become routine over the past five years, but they are shifting into road gear as farm prices for commodities continue to fall from earlier highs and projections for 2014 farm income are being revised downward.

Two recent business news articles add strength to bubble bursting rhetoric with forecasts that land prices could fall by from 10 percent, in one economist's estimate, to as much as 30 percent within three years under another's warning. To answer what that might possibly mean, recall that American farmland prices fell 27 percent from a high in 1982 before what is called the "farm financial crisis" began a recovery in 1987 - the last time we had a major land bubble burst.

Composite U.S. statistics don't prevail everywhere. Minnesota had 1980s' land price collapse as much as 50 percent with some foreclosure actions. Painful for anyone with a long enough memory, we saw the same thing happen to young families when the housing bubble burst with the Great Recession and home mortgages collapsed from 2006 through 2009. Rural Minnesota, and rural America, for that matter, don't need a repeat of the '80s farm crisis coming while urban Minnesota is still recovering.

Some adjustment in land prices are reasonable if farm commodity prices do moderate after strong demand factors and drought shortened supplies and ran up prices in 2012, said Bob Bergland, a former Minnesota congressman and U.S. Secretary of Agriculture in the 1970s. That runup came after several years of strong export demand and biofuel production increases that raised corn prices while lifting prices for other commodities.

But an adjustment in land values doesn't have to be a collapse, Bergland said in an interview from his home at Roseau.

What Bergland would like to see is for people to pause to see where markets are going before panicking. Agriculture thrives on stability, not volatility, he insisted while a member of the House Agriculture Committee working on federal farm policies in the early 1970s. While he was agriculture secretary in the latter half of that decade, USDA economists did studies that showed every extra dollar made in farming was instantly absorbed by rising land costs.

"I've seen this time and again over the years," he said.

That's what makes his perspective important for farmers, bankers, suppliers and neighbors monitoring the farm economy in Minnesota this year.

Commodity prices have been falling. Corn traded at the Chicago Board of Trade, for instance, have fallen from a high of $8 a bushel in July to $4.10 one recent session, and prices for other farm commodities have also shown weakness. Nervousness about market trends and over land costs prompted  Bloomberg's Elizabeth Campbell to quote Kansas State University economist Terry Kastens in warning that land prices across major farming areas could fall by 10 percent in 2014.

Her Bloomberg colleague, Kathleen Howley, raised the stakes on a farmland bubble by quoting an agricultural banker Dec. 16 in warning land prices could fall 30 percent over the next three years as global demand for grain weakens and potentially less domestic demand for corn from ethanol plants could deflate commodity prices. That article noted USDA trade trackers have watched global demand for grain decline 35 percent from an all-time high in May.

These gloomy reports come after current U.S. Agriculture Secretary Tom Vilsack announced Nov. 14 that agriculture exports hit a record high of more than $141 billion in fiscal year 2013, and that agriculture had continued to be a bright spot on the U.S. economy coming out of the Great Recession. The agricultural industries just finished the strongest five years ever with exports up $230 billion above totals for the previous five years.

In his announcement, Vilsack again drove home the need for Congress to act on stalled federal farm legislation that keeps demand for food and for American exports in place. USDA calculates that American taxpayers get back $35 for every dollar spent on export promotion under farm bill programs. "With record agricultural exports supporting about one million American jobs, we can't afford to lose the incredible momentum of recent years," he said in his statement.   

Far more money is at risk for the U.S. economy and for agricultural and food industry sectors as the dysfunctional House of Representatives engages class warfare battles over the farm bill. The two biggest public policy drivers of the farm economy are the food assistance programs for the poor, young, elderly and disabled, on the domestic side of the market, and export trade that reduce price-depressing surpluses.

Both sets of food-related programs are part of what Bergland sees as important stability policies for agriculture. Strip those away and we can have a farmland collapse while farmers' customers go to bed hungry, both at home and away.     

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  • Tim Gieseke says:

    December 19, 2013 at 3:28 pm

    The best method to promote “irrational exuberance” in a risky business like farming (or finance) is to give the impression that those that leverage themselves the farthest will be saved when the inevitable happens. 

    A lot of land was bid up by irrational farmers with a lot of money recently earned along with some borrowed money.  A land sale in NW Iowa sold for ~$22,000/acre last year.  Should we save them if they run out of capital?  There is still a lot of funds in farmers accounts, and if no one wants to give up their savings, then now might be a great time to retire from farming.

    Farmers may work a lot harder than financiers, but they are no less or more greedy than the next person.  Risk and its consequences are the few proven means to temper greed.  If you believed and acted like corn was going to stay at $8/bushel, then we don’t want you in the farming economy anymore - you are just going cause the rest of us even more problems if you to get bailed out.