All Bubbles Burst

      As written in this column before, we have talked about the large increases in ag land values. While ag land values are going up in Wyoming, it isn’t near what is happening in the Midwest or Corn Belt. Lack of precipitation in Wyoming would be the main cause as good crop land in Wyoming has an irrigation ditch running to it or a pivot above it. In 2011, irrigated lands in Wyoming sold for an average of $2,050 and non-irrigated sold for around $750. With the ongoing drought, one wonders what the values are today.

Anyplace in the Corn Belt, and especially farm land with a pivot, has really jumped in value, this has been caused not only by high crop values but also by low interest rates. Some say they have risen just too fast. 

Some are concerned of a repeat of the farm crisis of the 1980s. 

“Back in the 1970s we got way above trend growth, and it looks like that is what is happening again,” said University of Missouri Extension Agricultural Economist Ron Plain. “Last year we were more than $500 per acre above trend for the average acre.” 

The 1970s run-up of land values ended in the early 1980s with a collapse of farmland prices. While Plain says there is a possibility of a land price bubble in the future, a drop in farmland value today would not have the same catastrophic impact it had 30 years ago. 

“In 1981, farmland prices were around 150 percent above trend with the trend going up six percent a year,” he said. “Without a price drop, it would have taken a long time to close that gap.” 

Today, farmland values are 22 to 25 percent above a six percent growth trend, and it would only take four years of steady land prices for the trend to catch up with actual prices.

“So we are not nearly as vulnerable,” Plain said. “The downside risk isn’t anywhere near what it was in the 1980s.” 

But the downside risk is still present, and a bubble-pop may be coming our way.

A factor in the 1980s bubble popping was a huge increase in interest rates, and many farmers took on a lot of debt and became heavily leveraged. What I’m getting at is that interest rates are at a 60-year low, and at some time they have to go up. Also some say that crop values have most likely peaked and should start declining, but that also depends on the drought. Higher interest rates with declining crop values and rising inflation could change things dramatically.

Some news for Wyoming and its grazing lands is that pastureland hasn’t seen nearly the run-up that cropland has in recent years but that may change. We have the smallest cattle inventory since 1952 and if cattle and sheep prices rise along with their numbers some say it could push pasture values up in the next few years. 

Time will tell if croplands are in a bubble as all bubbles will burst at some time. With both croplands or Wyoming pasturelands, be careful on borrowing. Money isn’t money unless it’s in your pocket.