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Corn field

Corn field

The boom in farmland values, which triggered frenzied auctions and record sale prices, is over. That’s the bad news for Midwestern farmers. The good news is there’s no bust on the horizon, economists believe.

Midwestern farmland values have soared in the past five years, along with grain prices, climbing as much as 20 percent two years in a row — something that’s never happened before. In some areas land prices rose 25 percent. One Iowa parcel sold for a record $20,000 an acre, and in Illinois, prices were reaching the mid-teens. Missouri farmland was fetching up to $5,000 an acre, up from $500 or $600 a quarter-century ago.

The rise in values drew not just farmers, but outside investors who began to see American farmland as a safer investment than the stock market.

But now, economists believe, the boom is cooling off.

“We’re talking about the first slowing in the rate of increase,” said Chris Hurt, an agricultural economist with Purdue University. “There’s a leveling off in farmland values, and with anything that’s had a strong upward slope, you’d expect this. The primary driving forces of this period of rapid increase are beginning to come to a close.”

Government mandates for ethanol and demand for grain from developing countries have been the major drivers behind record grain prices in recent year, which have stoked land prices. But now these and other factors are waning.

Mandates under the Renewable Fuel Standard call for 13.8 billion gallons of corn-based ethanol this year. But because most cars only take a 10 percent ethanol blend, ethanol is hitting what’s known as the “blend wall” — the limit at which ethanol can be added to the gasoline supply.

“We use about 133 billion gallons of gasoline,” Hurt said. “Ten percent of that is 13.3 billion, not 13.8 billion, so we’re running into a policy dilemma. We just don’t need a lot more corn.”

At the same time, economists say, demand from developing countries is tapering off. In China, where a growing middle class is newly flush with cash for grain-intensive proteins, incomes are declining slightly — and that has meant a slight slowdown in demand for American soybeans, Hurt said.

“Their incomes aren’t growing by 10 percent; they’re growing by 7 percent,” Hurt said. “There’s still very rapid growth, but it’s slowing.”

China, and other countries, are also buying grain from countries where farmers have expanded grain acres in response to high grain prices. With drought and rain curtailing American harvests and driving up prices over the past three years, those farmers — particularly in South America — have been able to capitalize.

“When prices of agricultural things get high, you see a supply response, and the response is really showing up now,” Hurt said. “We’ve seen multiple years of this explosion to the upside, particularly with short production. If we can get back to normal supplies in the U.S., we’re going to moderate these basic farm prices — and those prices are what drive land values.”

But most Midwestern farmers should be in fine financial shape. During the last agricultural bust, in the early 1980s, farmers were heavily in debt and many lost farms. But since then, lenders have been especially cautious, lending only a small percentage of a sale price.

Besides, farmers have been making record incomes, and that means they’ve been paying with cash — if they’ve been buying land at all.

“There’s a lot of talk of a possible bubble in land values,” said Ron Plain, an agricultural economist with the University of Missouri. “But the good news is we haven’t sold a lot of land, so not a lot has been purchased at these high prices. A lot of farmers have pretty good cash flow, so the land that’s been sold hasn’t been sold with a lot of debt.”

A stronger stock market, Plain said, has sent investors back to Wall Street. “I would guess we’re not going to see a lot of investors buying farmland.”

So, if farmers get what they want in the next couple of years — good weather and good harvests — farmland values could come down, Plain said. But in the meantime, they’re just growing at a relatively modest 2 or 3 percent.

“We’ve had weather, huge demand growth, changes around the world. What’s normal these days? We’ve lost our base of understanding,” Hurt said. “We’re going to learn what’s normal in agriculture in the next few years.”

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