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Minnesota's Bubble Economy: The Critical Need to Prevent our Farmland Boom from Busting

May 06, 2008 By Lee Egerstrom, Economic Development Fellow
 
Minnesota agriculture is riding high -- perhaps too high to be sustainable. Clearly, price bubbles are forming around farmland and commodities that threaten the long-term health of Minnesota's huge food and agriculture economy.

The integrated food and agriculture sectors still account for one-quarter of all Minnesota jobs, counting farming, processing, transport and retailing. Total global sales by Minnesota-based agriculture firms exceed the entire gross domestic product of about half the nations in the world. And right now, the food and ag sector is among the few strong generators of growth and prosperity at work in Minnesota's broader economy. Therefore, there is much at stake for Minnesotans both on and off the farm.

Unfortunately, the history of business cycles shows that booms don't last. Busts follow, and another is likely sooner or later.

Minnesota 2020 believes that all concerned about the health of agriculture and rural Minnesota should prepare now for a roller-coaster ride with the farm economy. A painful crash in the 1980s followed the boom era of the 1970s. But sometimes the U.S. and Minnesota economies had gentle landings after economic peaks. We can only hope, but cannot predict, that some equilibrium will settle in without great hardships to Minnesota families, businesses and institutions.

Minnesota 2020 prepared this report to look back and recall that we've seen surging commodity markets before, and to look forward and help Minnesota stand ready for what may come.

Key Findings


  • A farmland bubble market is forming in Minnesota, with winter sales bringing $3,500 to $6,000 an acre for prime land. Land appraisers and auctioneers say prices have more than doubled in five years.
  • Agriculture being major sector of Minnesota's overall economy coupled with the state's recession, it is critically important to Minnesota's economic health that the Ag sector remain strong.  A major Ag bust would be devastating to the economy.
  • Another bubble affects prices of commodities - crops, minerals and energy - and could burst just as it has in the housing market. Similar busts followed booms in previous farm economic cycles.
  • Farm income can drop sharply due to many factors, including weakened demand in a recession, improved global growing conditions that increase supplies and government interventions in commodity or capital markets. Forestland owners have already experienced a shock as the price of timber and pulpwood has fallen by half since 2005.
  • Escalating energy prices are driving up the cost of fuel, fertilizer, grain drying and related farm expenses. As a result, future farm profits are not assured for either crop farmers or livestock and poultry producers who feed high-priced commodities to animals.
  • A looming U.S.-ignited recession is threatening to spread to other countries. Speculative money now pushing commodity and farmland prices could seek other venues if demand weakens in domestic and export markets.
Recommendations

Spiraling commodity prices are already harming people on low and fixed incomes, and they have the potential to cause even greater disruptions to lives and the economy of rural Minnesota. As a result, Minnesota 2020 encourages two initial responses - preparedness and research.

Preparedness - Farmers, lenders and their financial advisors should be cautious, using current farm profits to pay down debt before input costs overrun higher commodity prices.

State officials should make sure the University of Minnesota Extension Service farm debt mediation program that was used successfully in the 1980s has the staff and resources needed to assist farmers in a crisis. Such a program could also help borrowers and lenders through the current home foreclosure crisis.

Research - Rather than wait until after a crash devastates the commodity and land markets, Minnesota policymakers should mount a preemptive and coordinated review, to guide lawmakers, state agencies, local governments, financial institutions, nonprofit, and service organizations.

Among the important questions to be considered:

  • What worked to ease rural families and communities through the 1980s farm financial crisis?
  • What state programs might be reactivated?
  • If either booms or busts lead to more consolidation of farms, what might rural communities do to diversify business activities and sustain populations?
  • What are the best uses for land, alternative energy development and community services should an agricultural boom turn to bust?

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