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Farmland investors talk of possible Iowa bubble

Article below on farmland values. Anyone have any thoughts/opinions if the market has a bubble?

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Farmland investors talk of possible Iowa bubble

'We believe we're in a profit bubble,' says speaker at Investment Expo

The possibility of a farmland bubble dominated the sixth annual Iowa Land Investment Expo on Friday, where speakers explored whether the blistering pace of price increases gives way to a disruptive decline or a soft landing.

“I don’t think there’s any doubt that there’s an agricultural land bubble,” said Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University.

Iowa prices surged 24 percent to $8,296 an acre in 2012, after jumping 32.5 percent in 2011 and 16 percent in 2010, according to the annual Iowa Land Value Survey published by Iowa State University.

An 80-acre tract of land in Sioux County, home to some of the nation’s most productive land, sold for $21,900 an acre in October.

Singapore-based investor Jim Rogers called that a “crazy” price for Iowa farmland right now. But he has no doubt land values will continue to rise in the next 10 years, even if there are some dips along the way.

“Even though I am bullish on Iowa, there comes a time when I can finally pay too much,” said Rogers, who co-founded the Quantum Fund with George Soros in 1973. “Some of the prices I’ve heard about in Iowa are surprising to say the least, especially if it doesn’t rain on that $20,000 acre.”

The general consensus among speakers at the two-day event: Whether the bubble pops depends on interest rates, loan quality and the agendas of the people doing the buying.

Dotzour said there’s little doubt that interest rates will escalate as the recovering housing market spurs economic growth. The only question is how soon. The nation’s benchmark lending rate — the federal funds target rate — remains in a record low range of zero to 0.025 percent, which has fostered historic lows for residential mortgage rates as well as other lending rates.

Stronger economic growth is expected to lead to higher lending rates in the next few years. The cost of borrowing for land purchases will increase with them, creating downward pressure on farmland values that could puncture the bubble under the right circumstances, rather than allowing it to gradually deflate via slower land appreciation.

Jim Knuth, senior vice president of Farm Credit Services of America, said the likelihood of a decline in prices is remote as long as lenders continue to make conservative loans with an eye toward the farm failures of the late 1970s and early 1980s. Stability also depends on farmers continuing to predominate among buyers, versus speculative investors seeking quick profits, and farm balance sheets remaining healthy.

Iowa agricultural lenders typically require a down-payment of 45 percent or more today versus the 15 percent requirement that abounded in the 1970s and 1980s, he said. The higher down-payment standard translates into better repayment results by discouraging borrowers from taking on more debt than they can afford to repay.

Knuth noted that farmers made 79 percent of Iowa cropland purchases in 2012, compared with 73 percent in 2010. The percentage of out-of-area investors fell to 8 percent from 13 percent during the same period, according to Farm Credit Services of America data. The distinction is important because farmers are more likely to buy their land for the long haul, and pass it on to their heirs, making short-term price changes less important to them.

“The cure for high prices is high prices,” said Knuth, who advised farmers to refinance their variable rate loans at fixed rates to take advantage of the current low-interest climate before it changes. “Are we in a bubble? The answer is yes, but it’s not the bubble you think. We believe we’re in a profit bubble.”

Healthy farm balance sheets should allow Iowa to survive a short-term decline in farm prices if one occurs, even if it dents profits, he said.

The Land Expo was organized by Peoples Co., which specializes in farmland financial issues, and drew more than 600 people.