Surging land prices have local analysts, farmers worried bubble could burst

2011-03-26T19:45:00Z 2011-03-27T22:35:06Z Surging land prices have local analysts, farmers worried bubble could burstBy Bowdeya Tweh bowdeya.tweh@nwi.com, (219) 933-3316 nwitimes.com

Hoosier homeowners still are feeling the sting of the recession as property values are sticking in the doldrums after hitting peaks in recent years.

But after taking a slight dip during the recession, agricultural land values are continuing to rise and have doubled their average from a decade ago.

Industry observers are carefully analyzing whether a bubble burst is possible with farmland values akin to what brought the real estate market to its knees, triggering the global financial meltdown.

Last month, the U.S. Department of Agriculture forecast a 6.8 percent rise in the farm sector's net worth in 2011, largely because of an increase in real estate values. Helping to boost projections for land, the agency expects net farm income nationally to jump nearly 20 percent to $94.7 billion in 2011 despite an increase in production expenses.

According to Brent Gloy, director of Purdue University's Commercial Agriculture Center, the value of average quality land in Indiana is approaching $4,500 an acre, up from less than $1,000 an acre in 1987. Growing world incomes, increased use of food crops for biofuels, low interest rates and a weaker U.S. dollar have helped push crop prices and land values higher, Gloy said in a Federal Deposit Insurance Corp. presentation earlier this month.

Despite concerns about a bubble burst, Gloy said he didn't think land values are dramatically inflated, although there is a great deal of uncertainty about future levels because of the complex global agricultural picture.

Fred Martin, associate broker at Indiana Location, Realtors in Kouts, said farmland prices depend on many other factors including the amount of farmable land on a property, land features, cost of production and past product yields. One of the problems he sees in Northwest Indiana is that people who are trying to sell are having a hard time finding buyers willing to pay their asking price.

"Land prices are getting to the point where I don't personally think I'd want to buy any more ground at these levels," said Morgan Township farmer Tim Stoner. "These are levels that if we lost 30 to 40 percent of the value of these commodities for any substantial period of time, it would be very difficult for cash flow."

Farmers have benefited from higher levels of agricultural production and exports in recent years, which are helping raise land values. About 26 percent of the country's soybean acres went to China in 2010, compared to 12 percent five years earlier, Gloy said in his report.

Susie Hayden, who farms about 4,000 acres of land in Eagle Creek Township with her family, said she hasn't seen much land changing hands since the recession and crash of the real estate market. Prior to the real estate collapse in the mid-2000s, farmers were more frequently competing with residential or commercial real estate developers who sought to develop agricultural land.

"I think if corn prices stay up, you might see some farmers buying land if it's available," Hayden said.

The run-up in prices is affecting groups of farmers differently, said Wayne Belden, regional manager with the Indiana Farm Bureau. For a young farmer, it may be difficult to procure land because of the high costs needed to buy it, but for older, well-established farms, the land is a stable investment.

Stoner suggested that instead of thinking price increases are bad, people need to understand that real estate valuations follow regular ebbs and flows. In the early to mid-1980s, farmers carried heavy debt loads as they borrowed against equity held in equipment or land.

When commodity prices dropped and interest rates "exploded," he said many farmers weren't able to service their debt and eventually lost their livelihoods. He said the good news now is that the capital positions many farmers have are a lot stronger than in any other time in history.

Now, Stoner said many farmers are working to build their capital positions and create a safety net when commodity prices start to erode, "which will happen."

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