Farmland prices are rising to levels not seen for 20 years in the United States.
Never mind that crop prices have fallen precipitously. Or that the last time land values were this high, American agriculture hit its worst slump since the Great Depression. This time, economists say crop land prices could soar even higher.
The reason: government subsidies are propping up real estate values.
This distortion helps farmers who own all or most of their land. But it makes it tougher for young farmers and others who rent most of theirs. And it's proving a taxpayer-supported windfall for nonfarmers who own agricultural real estate.
Current farm subsidies expire this fall unless Congress crafts a new one.
"If you assume that government subsidies will continue at the same rate for a long period, there's nothing wrong," says Sergio Lence, an agricultural economist at Iowa State University in Ames. "If you think that farm subsidies for some reason will be cut drastically, clearly these prices could not be sustained for a long time."
The rise in land prices looks particularly startling here in the Midwest.
For example: an acre of Iowa farmland averaged $1,926 this past year, the highest level since the all-time record of $2,147 in 1981, according to an Iowa State University survey. South Dakota set a new record.
Such rising values look out of whack while crop prices are falling. In Illinois, the average agricultural acre costs 18 percent more than it did in 1981 even though the price of its major crops, corn and soybeans, fell by a third.
True, farmers produce more bushels per acre, which cushions the blow of low crop prices somewhat. And if real estate prices were adjusted for inflation, today's farmland prices would not look so high compared to 1981. By the same token, the inflation-adjusted fall in crop prices would look even worse. And the bottom line remains the same: only in agriculture are investors willing to pay more and more for an asset that returns less.
"If you look at commodity prices, you say this is ridiculous," says George Schwab, senior vice president of UBS AgriVest LLC, a land management company based in Hartford, Conn. "Then you look at farmers' net income and a large percentage of their income comes from government supports."
This fall, the US Department of Agriculture (USDA) released a report confirming what experts have long believed. Federal supports for eight major crops have pushed land prices above their natural levels. In a broad swath of the central US, where the bulk of these government-supported crops are grown, federal programs have boosted land values by at least a fifth. Here in the midwestern grain belt, stretching from eastern Nebraska to central Ohio, they've pushed up real estate by nearly a quarter.
For most of the rest of country, which receives far fewer subsidies, the boost hovers around 10 percent. And in some agricultural areas where farm programs don't support prices directly, land values have fallen. Orange groves in central Florida last year declined by an estimated 11 percent, thanks to a plunge in citrus prices.
In some ways, pumped-up land prices help the agriculture industry. With three-quarters of their assets tied up in land, farmers often borrow against it to finance the following year's planting. With real estate stable or rising, bankers have little trouble making such loans.
"It depends on expectations about what land values will be in the future," says Charles Barnard, an economist and lead author of the USDA study.
The last time land prices peaked, farmers found out the hard way that expectations can change. About 1981, buoyed by high crop prices and rampant inflation, many farmers expanded their operations, thinking land values would keep rising. They didn't.
Instead, the Federal Reserve sent interest rates soaring. Suddenly, heavily indebted farmers were squeezed by rising interest payments and falling land values. Within five years, the average acre of Iowa farmland lost nearly two-thirds of its value. Thousands of operators lost their farms.
This time, the rise in land values looks more sustainable. That's because today's federal subsidies look more stable than 20 years ago. Few observers believe the federal government will abandon agriculture after more than a half century of price supports.
But Congress may try to target government funds more directly since the current program helps some farmers more than others. According to Mr. Barnard's USDA report, farmers own slightly fewer than 2 in every 5 acres of real estate on which they grow federally supported crops. That means operators who own all their land get a double windfall: all the direct subsidies and the indirect rise in land values.
But those who rent land, especially younger farmers just getting started, don't benefit from its rising value. In fact, they pay for it in the form of higher rent payments to landowners. Sometimes, depending on how their lease is structured, part of their federal subsidies flow directly to the landowner.
Some small-farm advocates say such a system speeds up rural consolidation. "Farmers are sick and tired of having giant farms get federal subsidies to drive everybody else out of business," says Chuck Hassebrook, director of the Center for Rural Affairs in Walthill, Neb.
All eyes are now on Congress to see what kind of subsidies it will enact. "There is still some uncertainly out there," says Bruce Gardner, agricultural economist at the University of Maryland in College Park. Once Congress passes a farm bill and farmers know what federal payments to expect in coming years, he argues agricultural land prices could soar even higher.