What’s the interest on your CD these days? One percent, maybe. And that’s good compared to the volatile last year in the stock market.
But in farm country, the price of land is seeing a boom that is buoying the rural economy at the same it is making some observers very nervous.
This year, the value of non-irrigated Kansas farm ground rose 20 percent, while irrigated farm land was up 15 percent, according to the Kansas City Federal Reserve Bank. The state’s ranch land was up 12 percent in value.
That comes on top of increases nearly as great in 2010.
Driving the increase, say experts, are high crop prices, strong farm incomes – at least in those places not scorched by the drought – and laughably-low returns for alternate investments.
Crop prices about doubled between June and December 2010 and have remained near those peaks this year. Beef prices have followed a similar trajectory, shooting up more than 50 percent from 2009 to peak in the spring of 2011.
Both crop prices and livestock prices have come down somewhat since their peaks.
The proceeds have put plenty of money in the pockets of many of the state’s farmers and ranchers. But many local farmers and ranches saw little or no profits this year after their crops were lost to drought, which hit southwest and south-central Kansas, as well as Texas and Oklahoma.
But the Fed reports that even in the drought-stricken areas high demand kept land prices stable.
By one estimate, two thirds of those buying farms and ranches are nearby farmers and ranchers, looking to expand.
It makes perfect sense, said Byron Enix, the Wichita-based senior vice president of American AgCredit.
“What are they going do with this cash? Stick it in the stock market?” he asked. “They could buy a piece of ground or they could pay down debt, both of which are better options.”
Another reason the prices are being bid up is that non-farmers are buying the land as an investment. Typically, these aren’t property flippers, said Chris Ostmeyer, a farm manager and real estate salesman for Farmers National. They’re often local businessmen looking for a long-term investment.
Buying a farm and renting it out generates about 2 percent in cash or 3 percent to 4 percent if the owners are paid in crops, Ostmeyer said.
Ostmeyer’s main job is keeping tabs on the 70 to 80 farms in the area that his company oversees. And, when one of his clients wants to sell, it is easy to make a good deal.
“There are more buyers than sellers,” he said “I’m not an agent who has to beat down doors.”
That’s something Mike Weber, who farms mostly wheat near Garden Plain, has seen.
At a recent auction for land in the neighborhood, a nearby farmer and an investor got into a bidding war. Land that Weber thought was worth in the low $2,000s per acre went for $3,300 an acre.
“It was a real battle of the checkbooks,” he said.
The ’80s all over again?
Economists and policy makers worry that we’re walking back into same situation that brought us the farm crisis of the early 1980s.
During the ‘70s, increasing exports drove crop prices up and fostered a belief they would stay up. Farmers borrowed heavily to expand their farms and buy machinery. But crop prices crashed in the early 1980s driving thousands of deeply indebted farmers into foreclosure.
Some worry that the bubble is again inflating, the most prominent being Thomas Hoenig, former president of the Kansas City Fed.
In February, Hoenig testified before Congress that when interest rates rise, they will hammer farm land values. Even if crop price stay high, an interest rate closer to the historical average would push land prices down by up to a third.
That, he said, “most certainly would erode the financial health of the farm sector.”
Enix, the banker, said that he is watching closely. He thinks land prices generally reflect the true cash generating ability of a farm, rather any kind of speculative frenzy. In that way, this is unlike the recent housing bubble.
But, he said, interest rates will go up and crop prices probably will come down. And when that happens, farm land values will fall.
The good news say observers is that farmers have far less debt than they did in the 1970s and 1980s, and it is less expensive because of the low interest rates.
In fact, according to the Kansas City Fed, farmers are using some of their newfound cash to pay down existing debt. The amount of farm lending is actually falling, according to the Kansas City Fed.
That means farmers generally are becoming less indebted rather than more indebted as the year goes on.
That will help greatly when the land prices deflate. It’s the job of the farmers, the banks and the government to try to manage that deflation, if and when it comes.
“Is there risk building out there?” Enix said. “I think that there is. I would not say it’s impending doom, but there is a good chance that these land prices will not stay this high.”
But when, and if, they come down, it will make farms more affordable for a generation of younger farmers who have been shut out.
Joshua Seiler, who is in his late 20s, farms rented ground north of Goddard. He said he is interested in buying, but not at these prices.
“I’d have to take out more loans,” he said. “Interest rates are favorable, but still ... it just doesn’t pencil out.”