Chart of the Day

Stuart Staniford looks at farmland prices and makes some good points:

Ignore the black (nominal) line and focus on the green inflation-adjusted one.  Farmers were on average losing money for decades following the peak of the 1970s, and so farms lost most of their value in the eighties and only reached the 1979 value again in the late aughties.  After a 22% increase in 2011, they are now well above it.

Overall, I take this data as confirmation of the views I expressed in the Fallacy of Reversibility a few years ago: that peak oil would tend to strengthen the industrial agricultural system by improving farm profitability via the biofuel channel.  As the plateau in crude+condensate production has continued since 2005, more data has accumulated and indeed farmers are making a lot more money than they were before then:

The year 2011 may go down in the annals of U.S. agriculture as a once-in-a-generation phenomenon. Undergirding the huge upward movement in farmland values was an unusual shift up in agricultural prices across the board. Not only did major crop prices move higher, but key livestock and dairy prices were higher as well. Corn, soybean, and wheat prices averaged 57 percent, 26 percent, and 45 percent, respectively, higher in 2011 than in 2010. Milk, hog, and beef cattle prices rose 23 percent, 21 percent and 21 percent, respectively, although producers faced costlier feed as well. (These figures were computed from U.S. Department of Agriculture [USDA] price data.) According to the most recent USDA estimates, these agricultural price increases helped set a nominal record for net farm income of $98.1 billion in 2011, a 24 percent jump above 2010 levels.

Of course there are risks in this.  Farmers will be taking out loans, signing leases on acreage, and buying equipment based on these higher valuations.  That means either food prices have to stay high - or go yet higher - or farmers will suffer.  There is a risk of bubble dynamics developing if farmers and investors get used to rising prices and start to feel that they are bound to continue.  And if food prices go higher, that will be destabilizing to some sectors of society, particularly poor urban neighborhoods.  That's what we saw in the Arab Spring last year - and while that may end up being beneficial to the societies in question (I think the jury is still out on that), there is probably only so much of that kind of thing that the world can cope with at any given time.

He makes a number of important points that I think need to be emphasized.  One, while farming has been great the last few years, it was terrible not that long ago.  Two, ethanol production has had a good bit to do with this, and I'm not sure that is sustainable.  Three, farmers are counting on continuing high prices to cover cash rent and land payments, and if that dynamic changes, there may be serious trouble.  Finally, consumers are seeing rapidly increasing food prices, and that isn't going to be sustainable, economically or politically.

Right now, farmers are convinced that Chinese demand will justify high prices.  I'm not so sure about that.  The Chinese economy doesn't look nearly as stable to me as some folks claim.  Then again, what do I know, I haven't been west of I-35 since I was four years old.