Land Booms, Bubbles and Busts: Reflecting on Land Values at the Start of 2013 - UNL CropWatch 2013

Land Booms, Bubbles and Busts: Reflecting on Land Values at the Start of 2013 - UNL CropWatch 2013

January 17, 2013

Bruce Johnson: Unlike the last boom/bust period of the 1970s and 1980s, we do not have an agricultural sector that seriously over-leveraged with debt.... So a total agricultural land market melt-down seems remote.

In this week's Cornhusker Economics UNL Agricultural Economist Bruce Johnson looks at historical cycles in ag land values as well how current trends differ from previous ones. Johnson annually conducts surveys and reports on the state's ag land values and cash rental rates.

One lesson to be learned from economic history is this: real estate booms create bubbles, which lead to real estate
busts. Having studied the agricultural land markets in Nebraska for nearly 40 years, I’ve witnessed the complete cycle: from the 1970’s boom through the 1980’s bust, and the subsequent economic toll of foreclosures and asset devaluation which lingered across the agricultural landscape for more than a decade. To be sure, individuals, families and the business community learned hard lessons from the experience.

Vowing to not fall into that trap again, market participants and financial institutions generally embraced a more conservative real estate investment strategy. Expected income earnings, with a good measure of risk management factored into bid levels led to a more deliberate land market pattern for a number of years. In fact, up until just five or six years ago, the market for agricultural land was generally moving on a gradually upward trajectory that was reflective of historical income levels and fairly conservative expectations.

Then the development of a perfect economic storm for agriculture — particularly crop-based — rolled onto the horizon, shooting commodity prices and farm income levels to new heights. In just five years, the value of this state’s agricultural annual production rose nearly 80 percent, while Nebraska’s annual net farm income more than doubled. At the same time, United States monetary policy of dollar stimulus and record low interest rates (for savers as well as borrowers) converged to make agricultural land ownership the new sweetheart of investment.

Now, let’s fast-forward to today in early 2013.

Nebraska’s all-land average value has more than doubled in less than five years, and in some areas of the state has climbed more than 125%.

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