This year, the US experienced its worst drought in over 50 years, destroying corn and soybean crops across the Corn Belt. Surprisingly, regardless of the drought, farmers are continuing to invest more in planting. Taking advantage of low interest rates, farmers are snatching up land, rather than investing in stocks and bonds.
Even in our tough economy, farmland prices – with the exception of the recession in 2008 – have doubled since 2005. Banks are worried that the same thing that jumpstarted the recession will occur with farmland to create a “farmland bubble”. But such a bubble is far from farmers’ worries; farmers are more concerned about growing their businesses so they can produce more crops and increase their income. Rather than buying stocks or leaving their money in the bank, many farmers feel that investing money in farmland is more practical.
The demand for farmland is high, which has caused some banks to worry that farmers will make poor choices. Such was the case in the 1970s and 80s, when many farmers were piling up more debt to acquire more land, and using their farms as collateral. The debt inevitably left many farms in ruin and led to sinking land values.
The drought has caused a surge in soybean and corn prices, probably a main factor in the farmland boom. The Department of Agriculture has reported that the likely net farm income for 2012 is $122 billion, a 4% rise from the $117 billion in 2011, the record net income level since 1973.
Farmers have less debt then 30 years ago. Low interest rates also make borrowing less expensive, which can be helpful for farmers; but farmers might be in trouble if interest rates rise and crop prices fall.
The question to answer: since farmers have continued to invest in land, will we see a reemergence of plummeting land values? And what happens if, in 2013, farmers have to suffer through another drought?
Conceived, Developed and Written by Dr. Subodh Das and Tara Mahadevan
November 12, 2012
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