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Senior Contributor

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.

 

 

 

 

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Senior Contributor

Re: Farmland investors talk of possible Iowa bubble

As the article mentioned, the banks are requiring a 45% downpayment in Iowa. Is this also the case in the other corn belt states? I am just curious about if Iowa is just the only banks that are requiring this large downpayment requirement. A 45% downpayment on farmland is a huge amount I think.

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Honored Advisor

Re: Farmland investors talk of possible Iowa bubble

I would sort of feel that a down of that magnitude reflects some sense of how much an asset could be overvalued...the difference between what it sold for this time, and what the lender thinks he could get for it if he has to unload it.  

Advisor

Re: Farmland investors talk of possible Iowa bubble

25% required last ground I bought 3 years ago.  NW Ohio

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Senior Advisor

Re: Farmland investors talk of possible Iowa bubble

This all depends on the individual borrowing the money.  If you've got additional land to lay out for collateral, you can borrow 100%.  At least in Kansas.  Common sense, if you've got a large debt load you need more down payment.

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Honored Advisor

Re: Farmland investors talk of possible Iowa bubble

That is just an illusion of borrowing with no money down...you have put every cent of your collateral "down"!

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Senior Advisor

Re: Farmland investors talk of possible Iowa bubble

As collateral, not cash.  Big difference.

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Advisor

Re: Farmland investors talk of possible Iowa bubble

RSW - do not know how to tell you this . . . but I was there . . . everyone except the nimrod economist from Texas whose lecture was great and entertaining, but nothing that he did not say last year.   The rest of those discussing farmland, indicated that see the price continuning upward for at least three more years, and longer if grain prices continue to rise, and the destruction of the dollar by the FED continues.

 

 Americans chasing farmland are more concerned about Principal protection right now than ROI.  Who gives a rats ass about ROI if you cannot even get the originial capital invested back.  Like what happened in the 80;s in farmland, and happened in residential housing over the past five years.

 

I think most of the speakers were more aleigned with your beliefs publshed here, than with a land bubble.  The title of the article was not representative of the majority of the speakers at that event.  Adios Amigo. John 

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Honored Advisor

Re: Farmland investors talk of possible Iowa bubble

Not really...if you default.  Equity or cash, you have blown it.  When people start thinking there is a big difference, they convince themselves to do things they probably shouldn't do.  

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Senior Advisor

Re: Farmland investors talk of possible Iowa bubble

Kay, I'm not trying to argue, but I will present a scenario where collateral will work where cash won't.  All figures are fictional.

 

I've got $80,000 cash in the bank, I've got a chance to buy another 80 for $800,000 but it requires 10% down day of sale.  I own the ajoining 80 so this would give me the entire 1/4 section.  The land bank said they would waive the 10% down if I offered my existing 80 acres as collateral.  The deal is reached for option #1.

 

If I pay the 10% down payment, I have nothing left to operate, so I would have to possibly mortgage my existing ground for operating expenses, now I've got 2 loans I am paying on.  This would be option #2.

 

Wouldn't it make more sense to offer your existing land and keep your cash on hand for operating expenses?

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