With the U.S. grain harvest set to bounce back and pressure crop prices after last year's drought, some economists have cautioned that sky-high U.S. farmland prices may be a bubble about to burst.
Kansas City Fed President Esther George has warned of rising farmland values. Capital Economics economist Paul Ashworth said in a recent research note to clients "there does appear to be a localized bubble in Corn Belt farmland values" and the biggest factor has been a surge in grain prices.
But most farm bankers and industry analysts don't see a bubble in record crop land prices set in the last year from Nebraska to Indiana. This year, farmland has still been selling for $10,000 an acre or more in top growing areas of the Midwest and Great Plains, though prices are rising more slowly than last year's dizzying pace of more than 20 percent.
Global food and fuel demand for corn, the bellwether Midwest crop, justifies high land prices, farm economists say. Low U.S. interest rates have also encouraged buying.
But even if grain prices decline and U.S. interest rates edge higher, analysts say demand for crop land from cash-rich big farmers should stay strong.
"Farmers are still buying," Jim Farrell, chief executive of Farmers National Company in Omaha, Nebraska, the country's largest farm manager, said in an interview. "Many in the industry think if we take corn prices down to the mid $4 bushel range and they stabilize, that is going to slow down the increase in land values or stabilize the market."
Sam Miller, head of agribusiness for BMO Harris Bank, said booming grain prices have improved balance sheets among big grain farmers, which should keep them interested in farmland.
"The two biggest levers have been the price of corn and interest rates," Miller said. He predicted pressure on farmland prices if the corn price dips below $5 a bushel.
"Certainly, if it gets to $4, the price of land will have come down ... I'm not forecasting that we will see a collapse in land values. I think we'll have a correction."
Chicago Board of Trade December corn futures prices are down 6 percent since the first of the year, but were still well above $5 on Wednesday, up 15 cents at $5.65-1/2. The U.S. Agriculture Department this month projected next season's average farm gate corn prices to range from $4.40-$5.20 a bushel, about 30 percent below last season's average.
Farrell said a bumper harvest "would pull some of the fire out from under the market at least in the short term." He added that higher interest rates also would have a "softening effect" on land prices. "I don't think it would be a bubble pop."
For decades, corn prices hovered between $2-3 a bushel. But they surged once the ethanol boom began in 2006. The biofuel now consumes 40 percent of the corn crop. Corn land values went up, as did competing soy and wheat and pasture values.
This year, USDA forecasts corn production from 97 million acres will set a record, at above 14 billion bushels. That would be good news for exporters, corn processors, ethanol makers and livestock feeders.
Banker surveys in the first quarter showed Midwest and Plains farmland price gains slowing but firm. Little new land came on the market over the winter, bankers and brokers say. They will watch for any revaluation after harvest.
"We stress test our portfolio. If we go to $4.50 corn, I would actually welcome that. It may create a buying opportunity," said Perry Vieth, head of land investment firm Ceres Partners based in South Bend, Indiana. "From a long-term basis, we see higher prices."
USDA expects U.S. corn exports, the world's largest, to nearly double next season to 1.3 billion bushels. Ethanol demand will rise to 4.9 billion bushels from 4.65 billion. Feed usage will be up to 5.2 billion bushels from 4.4 billion.
Such buoyant demand, along with strong government crop insurance, means farm lenders are less worried that a potential bubble in land prices might threaten farmers who have not been paying down debt.
Jill Long Thompson, head of the Farm Credit Administration which oversees the single largest farm lender, the Farm Credit System, says that for farmland prices to spiral downward there would need to be a long downtrend of commodity prices.
"Producers are in a very strong position financially and the policy put in place by Congress allows farmers to plan for downturns. The crop insurance program is a very effective risk-management tool," she said, adding that higher yields offset lower corn prices.
Jason Henderson, former chief economist for the Kansas City Federal Reserve and now director of extension at Purdue University, said easing crop prices should not sink land values.
"I'm not envisioning a huge decline in farmland values. It would be more of a plateau in the market because there are a lot of things that are favorable even if corn prices decline," he said, citing lower farm debt and low interest rates.
"With debt to asset ratios at 10 percent you'd have to have a 50 percent decline to really trigger selling," Henderson said. "That's what we had in the 1980s."
David Oppedahl, a Chicago Fed economist, said: "The general consensus is that so far at least, there hasn't been a bubble in farmland values. Given what's expected to happen this year, we could see a pause. But the expectation is that most of the people who have bought farmland are not buying it to look for a selling point. They want to buy it and expand their operations and make the farm more profitable."