WRAPUP 4-US farmland prices surge to record; investors grow wary

Tue Nov 15, 2011 5:02pm EST

Related Topics

* Bumper crops, biofuels and export demand power gains
    * Farm balance sheets improve as debts paid, land acquired

    By Carey Gillam and Christine Stebbins
    KANSAS CITY/CHICAGO, Nov 15 (Reuters) - U.S. farmland
prices in the third quarter surged to the highest levels in
more than three decades amid an accelerating agricultural boom
that has so far defied fears of a bubble about to burst.
    Prices hit record highs in the U.S. Plains, where wheat and
cattle dominate production, and jumped 25 percent in the
Midwest Corn Belt, where bumper grain crops and recovering
livestock markets put more money in farmers' wallets and
enticed investors to bid up for the fertile ground, according
to two Federal Reserve bank surveys issued on Tuesday.
    The surge has picked up pace even as major crop prices fall
from peaks earlier this year, cheering farmers who have seen
their land values rise nearly tenfold in a decade, but vexing
economists who worry that a country still mired deep in a
housing slump can ill afford a destabilizing rural crash.
    "It is amazing," said Carl Sousek, who has farmed for 30
years in east-central Nebraska. "I've been in this business
long enough, I remember working a night shift just to get by,
to be able to buy Christmas gifts for the kids. These are good
times."
    Investor enthusiasm is starting to cool as prices rise,
fueling fear that the farmland value bubble may be about to
burst. But many experts say the tell-tale signs of an
unsustainable boom are lacking.
    Unlike the 1980s, buyers are paying cash, not relying on
credit, and farmers are paying down their debt loads. Demand
for U.S. grains by China and other countries shows no sign of
subsiding as the world's population tops 7 billion and is still
climbing. And growing demand for biofuel, which uses about 40
percent of the U.S. corn supply, remain strong supportive
factors, experts say.
    Indeed, strong farmland prices are a rare bright spot for
the U.S. economy. Grain farmers are retiring debt and building
equity, moves that buttress farm banks and lenders like the
Farm Credit System.
    But early warning signs are starting to appear. While
arable land in the world's most productive consumer is limited,
South America and Africa are attracting billions of investor
dollars for the tilling of land that is much cheaper than U.S.
acres.
    "We are essentially on the sidelines in the Corn Belt and
Nebraska. In our judgment, prices there are too high," said
James McCandless, head of global real estate-farmland for UBS
AgriVest, a major investor in U.S. farmland production of 25
different row, vegetable and permanent crops.UP 25 PCT ON 2010
    Cropland values in the Plains states rose more than 25
percent over the past year to a record high while ranchland
values increased 14 percent, the Federal Reserve Bank of Kansas
City said in its quarterly survey of 243 banks in the region.
It was the fastest rise in cropland values in the survey's
history.
    Nebraska posted the strongest gains with irrigated and
nonirrigated land values rising approximately 40 percent above
year-ago levels, the Kansas City Fed said of the Plains states.
Oklahoma, mired in one of its worst droughts ever, saw a gain
of just over 10 percent, however.
    Meanwhile, the price of farmland in the Midwest Corn Belt
rose 25 percent in the third quarter, the biggest year-on-year
jump in more than three decades, a survey by the Chicago
Federal Reserve Bank showed.
    The top U.S. corn-growing state of Iowa is seeing
eye-popping prices, according to land brokers.
    Last month, buyers of an 80 acre farm outside Des Moines
paid $16,200 an acre for the row crop and pasture land, a
staggering amount that surprised veteran land agent and
auctioneer Jeffrey Obrecht of Farmers National Co in Iowa.
    Ten years ago, farmland in the county was valued at $1,892
an acre, according to an annual Iowa State University survey.
    "We had an opening bid of $10,000 an acre, and it kept
going up and up and up," Obrecht said. "That was a lot, even
for what we're seeing out here."
    The rising values have helped buoy earnings for big farm
equipment firms as flush farmers feel more comfortable
investing in new tractors and other equipment, although it has
not helped their shares outperform the broader U.S. market this
year.
    No. 1 Deere & Co is down 10 percent, No. 2 CNH
Global NC down 17.5 percent and No. 3 Agco Corp down 8.8 percent so far this year, while the broad
Standard & Poor's 500 index is little changed. All three
companies' shares are up sharply over the past month, though.
    BUBBLING UP?
    Fears of a farmland bubble have been spreading for more
than a year, fueled by warnings from some analysts and federal
monetary leaders.
    Leland Strom, CEO of the Farm Credit Administration, told
Reuters Tuesday that he viewed the current climate with
"extreme caution."
    "I'm not ready to term it an asset bubble. I think we are
in an era that warrants extreme caution by those in the
industry, the farmers or investors who are purchasing land," he
said.
    Many say fears of a bubble are overblown, however. They
point to fundamental demand for food and the fact that
speculative investment in the sector is limited.
    "Agriculture is cyclical, but typically when you have a
bubble you have certain characteristics that are not in this
market," said Loyd Brown, president of Hertz Farm Management,
which handles acquisitions and farmland management from
Colorado east to Illinois.
    Although crop prices are down some 20 percent or more from
their peaks earlier this year and about flat from a year ago,
livestock prices remain higher, supported by strong demand.
    The Chicago Fed also said that farm credit conditions
continued to improve and interest rates on farm loans fell
below the prior quarter's record lows.
    "Farm credit conditions generally held steady across all
district states in the third quarter," the Kansas City Fed
said. "Bankers reported strong agricultural loan portfolios
even with varied farm income levels. The loan repayment index
was little changed from the second quarter and remained well
above year-ago levels," it added.
    Back in Nebraska, Sousek and his 24-year-old son would like
to buy more land but have so far focused on paying down debt
and improving their cropland. The good times are good, he said,
but he is cautious about making more acquisitions.
    "We've had good times and bad times ... things can change
in a big hurry," he said.
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