Is a 'farmland bubble' looming?

The Wall Street Journal just caught up with the boom in farmland story yesterday. The price of farmland has doubled over the past past 4-5 years in the nation’s heartland. While some question the rise in prices, rationalizations have appeared as is always the case.

Less than 2% of the cropland in Iowa is sold each year, and 74% of it ends up in the hands of local farmers, who tend to buy for the long term and often buy with cash instead of debt.

Except that TIAA-CREF is not exactly your garden variety “local farmer.” The retirement system for employees of nonprofits, has acquired 600,000 acres of cropland worth $2.5 billion, about half of which are in the U.S.

“If opportunities arose, we could double our portfolio,” said Jose Minaya, TIAA-CREF’s head of natural-resources investments tells the WSJ.

“Investors discount worries of a price bubble, if only because the rapid appreciation in land doesn’t seem to be fueled by easy credit. In states such as Nebraska, roughly half the land purchases are for cash,” Mark Peters and Scott Kilman write for the WSJ.

Well sure, but it now takes 6 years worth of a crop to equal an acre of land, when the historical metric is 4 years.

Also, while land prices keep lurching upward, crop prices are going the other way.

Whether leverage is used or not, land prices move up and down depending upon interest rates.

Sterling Liddell, an agribusiness analyst at Rabobank, said Midwest cropland prices could drop 12% to 15% sometime over the next three years to five years if interest rates climb back to more-normal levels, which would make alternative investments more attractive.

This isn’t the first boom in farmland prices and it won’t be the last. Nothing causes memory loss as surely as an investment mania. As I wrote back in July, “Every new bubble feels different.”