Farmland Values and Prices

Today comes the news that South Dakota’s farmers saw a substantial increase in value of their land portfolios:

University economists report a 16.5 percent jump in the value of agricultural land in South Dakota the past year.

That’s a remarkable return on investment. I don’t know for certain, but I’m thinking it might have outperformed the US stock market during the same period by about 3 or 4 times.

Why was this, you ask?

The survey attributes the rise last year to high commodity prices. The economists say rising cash rental rates and relatively low interest rates the past 20 years helped drive up demand for farm land from investors and farmers looking to expand.

Ah, yes. Commodity prices. Otherwise known as corn and soybeans (and beef, etc). But what drove up the commodities?

About 5 billion bushels of corn are taken off the market annually by the U.S. subsidies.

There is one reason. Substantial increase in demand–though not for corn to be used as human fuel–are driving up land prices.

So, we have land which is currently valued at about $3000 per acre–and 4/5ths of the landowners believe that values will continue to rise. By so saying, it would seem that they believe that commodities will also continue to rise. While I would wish that no oneĀ  lose value, I believe that farmland in South Dakota may well be overvalued in the sense that current prices are propped up by massive subsidies.

In short, we may well be looking at a farmland bubble which is being driven by unsustainable federal government financial policies.