I Smell A Bubble

Dayton Daily News:

Forget the gold rush. The most valuable material in the land right now might be the land itself.

While gold prices have retreated after surging to near-record highs, the value of farmland continues to climb at a brisk clip, driven by surging prices for agricultural commodities and a dearth of available property.

In Ohio, the price of farm real estate — which includes all land and buildings used for agriculture production — has shot up 7.5 percent from 2010 to an average of $4,300 per acre, the U.S. Department of Agriculture recently reported.

That was higher than the national average of $2,350 per acre, up 6.8 percent from last year, according to the report.

The boost in cropland prices alone was even greater, jumping 8.6 percent to $4,400 in year-over-year comparison.

It’s a trend that’s been gaining momentum for several years as U.S. farmers have planted more crops in 2007 and 2010 than any other year in the past 60 years, based on government data.

Why do I think it is a bubble?  All the talk about how it is a great deal:

Mike Weasel, a former banker and Realtor who specializes in buying and selling farmland for Wilson-Harvey Auction Group, with offices in Springfield, said investors are chomping at the bit to get in the farm real estate game.

“As an alternative investment, farmland has been pretty good,’’ Weasel said. “If I could find enough land to satisfy the demand, I wouldn’t have time to talk. There’s just a preponderance of people out there who are wanting to own farmland.’’

Many potential buyers are farmers or farm operators looking to expand their operations with cash on hand from the profits of several flush years.

Weasel has seen it first-hand. He said he recently sold 1,300 acres of farmland in Madison County, just west of Columbus, for about $7.5 million to two different buyers.

“I went to two separate closings, and both paid cash,’’ he said. “One was a neighboring farmer, and the other was an absentee landlord.’’

Historically low interest rates have also contributed to the land grab for farm real estate, Weasel said.

“Some farmers would rather keep their working capital and borrow the money (to purchase more land) for a lower rate than what the rate of return of the farm is,” he said.

These guys have millions of dollars in cash laying around?  I find that hard to believe.  To the contrary, I've heard that some farmers are mortgaging land they already paid off to finance new purchases.  I remember the housing bubble, when realtors and economists were claiming that there was a housing shortage, and we needed to build over 2 million new houses a year.  That turned out to be incredibly false.  I'm betting that commodity demand won't support record crop prices long-term.  I sure hope people don't get burned in this deal, but if you read about people investing in farmland in Money magazine, SELL.