Saturday, October 30, 2010

How we will know it's a bubble...

From FDIC head Sheila Bair to Marcia Taylor, eyes are peeled for a bubble in farmland.  But all the experts are tut-tutting the warning.
Today, I'd like to follow-up with an analysis coming out of the University of Illinois by Gary Schnitkey, who concludes that farmland prices are not a bubble and an appreciation of 3% next year would be in line with current conditions. His number one concern for downward pressure on farmland prices is the potential for (perhaps rapid) interest rate increases. His second main concern would be a decrease in farmland returns. He doesn't see either in the short term. [More]
I am way too close to the problem to be objective, but I do think this theory might help.
I was reminded of all of this today by an excellent post from Mike Konczal pointing out this exact phenomenon across bubbles and industries:
In my personal opinion, in the same way middle-class people turned amateur stock analysts was the sign of a tech bubble, or middle-class people turned amateur realtors was the sign of a housing bubble, middle-class people turned amateur credit risk analysts and credit channel intermediaries was the surest sign of a credit bubble.
The amateur credit risk analysts he is talking about are the person-to-person lending websites that were once very overhyped in terms of their potential. This is an amateur market I had not considered, but it certainly makes sense.
The lesson here is beware the amateurs. Wherever they gather in huge profitable masses a bubble has surely formed, and the longer they are able to walk around blithely picking up $100 bills off the sidewalk, the bigger the bubble is. [More]
I think these guys are dead-on.  And as a result, I think farmland will be hard to "bubblize" because there really is no market for amateurs to jump into.  Just like Berkshire Hathaway stock, farmland is denominated in too-large lumps for the truly Everyman investor.  Moreover, even now farmland trading velocity is not appreciably greater than the past.
The limited amount of land for sale, along with current returns and the safety of farmland as an investment, kept farmland values steady across the state in 2009. This is according to the 2010 Farmland Values and Lease Trends Report issued at the Illinois Land Values Conference. 

"There is a limited amount of land for sale," says Bob Swires, AFM, Swires Land and Management, Danville, and overall chairman of the annual survey and conference hosted by the Illinois Society of Professional Farm Managers and Rural Appraisers. "For example, there were 11,000 acres sold in northwest Illinois in 2008. That compares to only 5,900 acres sold in the same region in 2009." 

"Add to that the fact that potential sellers like the current returns, capital appreciation and safety of their farmland investment when compared to the low interest rates on CDs and bonds, and certainly the past performance of the stock market. They are just not letting go of the land," he says. [More]

In other words, nobody is "flipping" farmland. Combine that limitation with the tiny volume of farmland compared to financial instruments and other real estate, and the dynamics of a runaway market will be hard to achieve, IMHO.

What I think will happen is a steady chorus of jeremiads from outside observers for several years until a natural dip in the market occurs, (remember last year?) at which point they will dredge up their earliest warning and say they "called it".

But even then it will still be somebody's farm.  There is no bubble (or bust) if you are not selling.

Also, my barber is not giving me farmland tips.


Anonymous said...

Not sure I agree about ag bubbles. No maybe they can't easily get into farmland but if funds keep driving up the price of commodities and of ag related stocks as a speculative play that does have an indirect impact on farming and the price of land. Lots of outside money is at play in the ag markets and so from that perspective it does fit the bubble discussion that you have posted.

Anonymous said...

The bubble will come when everyone invests in farm land derivatives. If you can't own the real thing, why not buy a synthetic facsimile?

Anonymous said...

John, though I respect your insights and analysis on most subjects, I think you are somewhat delusional with regard to land. The continued upward valuation assumes the continuation of the status quo: Direct payments, ethanol subsidies, over-consumption of HFCS (Ooops, Corn Sugar), EPA non-enforcement of ag pollution, etc. There is a growing awareness of food (I mean actual food, not corn) and the environment that should not be ignored in this conversation.

John Phipps said...


I am heartened to see so much skepticism about farmland prices continuing to rise. You all cite valid reasons - we simply differ on the magnitude of their braking effect.

I will try to post deeper analysis of your counterpoints, but every day when I re-evaluate if I'm pointing the right direction I end up choosing land as my "treasure".

BTW, a new wrinkle could emerge Wednesday: the very real possibility of US default. How would that play out in the land market?

More soon.

Anonymous said...

FYI on Farmland activity

First Publicly Traded Farmland Fund To Be Launched

Oct 28, 2010 5:02 PM, Mike Fritz

Investors’ appetite for a publicly traded farmland fund could soon be tested with the planned initial public offering of Gladstone Land Corp. The McLean, VA- based company filed registration papers in August to sell up to $222.6 million in common stock.

If the offering is successful, Gladstone Land will seek to qualify in 2011 as a Real Estate Investment Trust (REIT) – a mutual fund-like structure that distributes at least 90% of its income to investors and is generally exempt from corporate income taxes.

This would be the first publicly-traded U.S. farmland REIT. Other groups, such as Optima Fund Management, New York, and Chess Ag Full Harvest Partners, Clarksdale, MS, have formed private farmland REITs they hope to eventually take public.

Anonymous said...

Hi John,
Anon 2 here. I didn't say the bubble was here yet, only that it is coming. The smart thing to do is to buy farmland now and sell some of it later near the height of the bubble to take a tidy profit; then pay down debt so that your balance sheet still looks good when farm land prices go too low in reaction to the bubble bursting. I'm with you farmland is not over priced now. We still look at our grain markets as domestic and not international. As the USD goes in the tank, ethanol prices rise with oil and export demand is unaffected because our customers don't pay any more in terms of their own currency.