For U.S. farmland, signs of a property bubble?

By James B. Kelleher - Analysis

CHICAGO (Reuters) - Investors who have never sat behind the wheel of a tractor are helping drive the price of U.S. farmland to record levels, attracted by its assumed safety following the meltdown in mortgage-related securities and excited by the potential of plant-based biofuels.

But is agricultural land really a good long-term investment? Or could the rush into rural real estate be just another Wall Street craze -- one that ends like the Internet and housing manias that preceded it?

An analysis of rents -- a key measure of U.S. cropland values -- suggests the returns investors can expect from farmland are not only substantially below those available in the stock market but in a long-term decline to boot.

That disconnect -- between fast-rising farmland prices on the one hand and fast-falling returns from farmland rents on the other -- has some growers and government officials worried a bubble may be forming, one similar to the one that took hold 30 years ago and left rural America reeling once it popped.

Iowa Bank Superintendent Thomas Gronstal is among those concerned. "Current agricultural conditions," Gronstal told lawmakers in U.S. Senate testimony on March 4, "are reminiscent of conditions experienced in the 1970s, which led to the economic and financial collapse of the 1980s."

Gronstal said soaring crop prices made "the agricultural sector look strong." But he warned that retreats in those prices could have an immediate and devastating effect on land values.

"If there has been too much leveraged or loaned against the inflated value of farmland, the bubble will burst and we will once again experience an economic crisis similar to that of the 1980s," Gronstal said.

RENTS: BLINKING RED?