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Senior Advisor

Re: The price of farmland

One should consider that the farmland value is effected by the dollar value. Money invested in CD's is worth less than 2%. So how good an investment is the dollar?

 

The fed intervention in money supply has driven interest rates to historic lows while devaluing the dollar. Thus it takes more of them to buy most anything. The dollar is suffering from deflation while farm land values are inflating. The big question is how long this phenomenon will continue.

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Senior Contributor

Re: The price of farmland


@kraft-t wrote:

One should consider that the farmland value is effected by the dollar value. Money invested in CD's is worth less than 2%. So how good an investment is the dollar?

 

The fed intervention in money supply has driven interest rates to historic lows while devaluing the dollar. Thus it takes more of them to buy most anything. The dollar is suffering from deflation while farm land values are inflating. The big question is how long this phenomenon will continue.


I think you have a very good point Don.

I just checked the 'Chart of the day'  http://www.chartoftheday.com/20110311.htm?T

and it is talking about the value of houses in ounces of gold.

You can see the value in gold on their chart but it left me wondering what farm land values would be in gold and how they relate today, to past times.

 

As others have posted it maybe does not matter what the 'value' of the land is if you want to farm it and buy it, you have to cash flow it. If production will not make the payments then no one except an invester with cash in his pocket can afford to own it.

For a few generations now farmers have been able to buy land and at least eke a living from it as well as make their mortgage payments then either pass it on to family or retire wealthy from the increase in value.

Perhaps we are returning to a period in history where the land will be owned by a wealthy class and farmed by 'serfs' who manage to just feed themselves but not have the gain in value to use for a pension plan.

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Veteran Advisor

Re: The price of farmland

Good point about the serfs---i kinda miss traveling up to Winnipeg--used to service CP railroad with freight car axles and enjoyed the ride through the Red River Valley--if the land gets to pricey it will loose it's personal value if corporate owned and then we go back to Robin Hood days of kings and paupers ? ?

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Honored Advisor

Re: The price of farmland

When I read kraft-t's post, my first thought was: How much does the price of land have to inflate, just to hold its own in devalued dollars? 

That would be the question for any asset now, I suppose.   Inflation has not kicked in formally - yet - but, with prices at the pump, and for everything that travels a distance to the store - which is really just about everything else - energy costs have to be factored in. 

For now, a lot of products are downsizing the amount of product in the package, and keeping prices level for the "item."  That is just hidden inflation to me. 

The ounces of gold factorization is intriguing...I guess it sets and empirical standard, so one can extrapolate a value.  I have never really gotten the intrinsic value of precious metals...you can't eat them, they don't keep you warm.  Too simplistic, I know, but things could get very damned simple soon enough. 

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Advisor

Re: The price of farmland

   Krafty you are a bit older than me and I was just getting started in the late 70's but does this remind you of those years?

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Advisor

Re: Makes sense

  The age of the purchaser comes into play also.  I'd say us 55+ do not need to buying land BUT we may be the ones best able to afford it.

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Advisor

Re: The price of farmland

   Isn't hindsight grand?

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Senior Advisor

Re: The price of farmland

Very much so but I don't know if the banks are adequately secured. I would think the bankers would remember those days and not be so free with loans. Having said that we do not have the high interest rates of those days. 

 

My limited experience with bankers recently indicates that they are not sticking their necks out too far. But then that is just my experience and may not be representative of ag bankers as a whole.

 

The spending in rural america is definately active, But I have no idea whether these guys are highly leveraged or not. I do suspect that bankers are more cautious than they used to be. I would think the bad paper in the housing market would give any lender pause about the risk in lending.

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Senior Advisor

Re: Makes sense

Actually, as we move towards retirement, we know we will be liquidating machinery and crop production and are likely to build capital that needs to be parked somewhere. Perhaps there are better options but savings certifcates produce little and the stock market makes us nervous. If you buy land you probably have no intent of selling it. You keep it for the next generation.

 

Thus a downturn in land prices does not matter much if you have no intention to sell. Long term it will probably retain its value or increase in value. Plus it will provide income far after we are gone from this world. BTW My 95 year old mother is drawing more per year in rent than the farm cost per acre in the 1930's. Dad inherited it in the 1930's and land was worth $100 per acre and more than that was owed on it. Whan My dad died in 1980, he was still praising the Federal Land Bank and FDR!

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Senior Advisor

Re: The price of farmland

Yes Mike, much less. However there were many farmers during the 80's that were cash flowing until they started devaluing assets. They decided that asset values no longer would support the risk of all that borrowed capital. Thus failure to acquire operating capital shut a lot of folks down.

 

Some could choose different bankers but most were squeamish about taking on problem loans when they already had more than they wanted.

 

I don't know if that exists or not today as grain farmers should be cash flowing pretty well given current market prices. Livestock producers may be a different story. Bankers surely learned the same lesson we did during the 80's and hopefully they aren't extended too far.

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