Farmland headed for a bubble?

[tombstone]

well, in april 3627 acres of irrigated land go for auction in bolivar county. it will not sell for less than 5000/acre. i woud guess closer to 5500. Argentenians have sucked up some large tracts for around $4000.

probably will see last year for direct payments.

[Northbigmuddy]

2013 will be the last year of commodity payments that we are familiar with. There will be a back door for "subsidies". Just not in the current form. An early post referenced the high liquidity/low borrowing percentages on these land purchases and that will be the reason the coming shift will be a correction instead of a collapse. The current prices are investment grade or tax exchange/haven deals. These buyers are using cash. The typical return rates mentioned here related to rents are where the problem arises for renters. A rent based off ag value is sustainable, but an ag rent based off investment grade prices is troubling. Ultimate problem is folks like pitstick and others set up similarly. They are definitely playing a small margin / insurance game. Theory is that they are so spread out that it mitigates the weather risk therefore justifying the small margin. The economies of scale those operations enjoy is phenomenal as well. For me it's agrivating to watch a big wig steam roll locals and then marginally farm the ground. It's business at the end of the day. Gotta pay to play, just make sure you've got a chair when the music stops.

[Po Monkey Lounger]

JMallard is correct re our region of the country.

It appears that the increase in the land prices in MS are primarily being fueled by buyers with lots of cash looking to park it somewhere other than the stock market and traditional securities in order to diversify their investment portfolios. These buyers include not only pure investors, but successful farmers looking to not only invest but add to their farming acreage. IF the land values do go down at some point, those type of buyers will not be immediately affected due to their low debt margins. They would, of course, suffer a balance sheet paper loss, but no loss unless and until the land is sold for less than the purchase price. Only the pure investors would be likely to sell at some point if the investment is not producing high enough returns. The farmers not so much.

The midwest bubble warnings are being fueled not only by the extremely high inflated prices (much, much higher than MS area), but the fact that many of the buyers are carrying a debt to fair market value ratio of 40% or higher. IF the land holds its high value, then there should be no problem with these ratios. But, if the land market suddenly plummeted (say by 50% or more), then those buyers/owners would most likely be facing a situation of owning land that is not worth the debt owed on it.

But, as many have pointed out here in this thread, the plight of some becomes the opportunity of others. And the beat goes on.

[jacksbuddy]

What happens when they pull those direct payment subsidies that pay the biggest portion of agriculture rent? Seems to me that government money is the biggest driver in ag land values in the delta. The Obamacrats aren't going to be fighting to keep subsidies in the budget like the democrats of the past, and republicans aren't likely to support them either.

The disappearance of direct payments will be made up in insurance programs.

Never understood a program that rewards farmers for failure

A bunch of the 'insurance' some farmers buy is simply put options on their production. They know what their cost of operation is, they know approximately how many bushels they are going to produce, so therefore they know their breakeven point per bushel. Then, when the price of said commodity reaches a certain price per bushel, they purchase put options to cover their downside risk. If everything goes to h311, then they exercise the options. If the prioces go up and over, they sell the product and let the options expire worthless. And with the profits, they go out and buy agricultural land.

[tica-tica]

I bet the corn/ethanol intrest is driving the higher prices in the mid west. I ain't good for duck production either because the high price for corn/ethanol leads to drained potholes and no cover around those that are not drained completly. Snow fall was very good this year so that will slow the draining down some.