American Farmland: The Next Bubble Story?

May 9, 2011

As the nation struggles to regain its economic footing after the real estate bubble burst and nearly thrust this country and the world into another Great Depression, a new bubble may be emerging.

Increasingly, economic experts are keeping an eye on America’s farms, which were collectively valued at about $2 trillion last year.

While this is just one-eighth of the value of the housing market, its bursting would not just be headline news for the 1,500 banks that are directly involved in agriculture lending.  Indeed, the impact would be felt by all sectors as these farms are the economic foundation and starting point for the food, feed, fuel, and fiber markets that so many of us take for granted.

A recent expose on the situation in rural America by the Economist called current conditions “undeniably frothy.”   The article explains that “inflation-adjusted farmland values remain well above the last great peak of three decades ago buoyed by strong commodity prices, low interest rates and a weak dollar.”

And the magazine isn’t alone in drawing parallels to decades past.  The Kansas City Federal Reserve recently credited rural America with leading the nation’s economic recovery but simultaneously warned, “Farmers have significantly increased their debt levels in recent years…the fastest increase since the prelude to the 1980s farm debt crisis.”

The Economist notes that the “big fear is falling commodity prices coupled with rising interest rates—hardly an unimaginable combination.”

And don’t forget Mother Nature.  Many growers, who would normally be planting right now, are instead fighting drought, battling floods, or picking up pieces from destructive tornadoes, depending on the part of the country from which they hail.

If things go south and folks start losing farms or farmland assets, the impact on rural America would be severe, the Economist pointed out. “Property accounts for a very high share of farming wealth: about 90% in the United States, compared with 20% for households.”

So how does Congress fit into it all?

Lawmakers will soon begin debate on a new farm bill, which will provide the policies and insurance options growers need to hedge risk and stay afloat if the bubble bursts.  Intense scrutiny of the budget in this bill has already begun, and some appear eager to cut gaping holes in farm policy.

This would be a huge mistake, according to former House Agriculture Chairman Larry Combest, who recently wrote to the New York Times: “Against all the misrepresentations about farm policy, I have some sobering news: if the bottom falls out on agriculture, existing farm policy is already too weakened to prevent a crisis.”

Now, he says, is not the time to weaken it further.  If that happens, a repeat of the 1980s farm crisis is far more likely.  Back then, there was a perfect storm of soaring commodity prices, farm incomes on the rise, and increasing land values just before the bottom fell out—eerily similar to today’s realities.

Given these warning bells, in addition to the growing demands of a growing world population, Congress should not weaken essential policies that support the men and women who are supplying our nation’s fundamental needs.

Rather, lawmakers would be wise to seek ways to make policies more relevant, in order to promote and protect this dynamic industry if the bubble bursts.