As
we have noted in our discussions about financial crises, individuals are
unlikely to listen to cynics in the midst of bubbles. This was the case with
the stock market bubble of 1929 as well as with the most recent housing crisis.
It may also be the case today with farmland today. This week, NPR produced an
article entitled, “Corn Belt Farmland: The Newest Real Estate Bubble?” which
argues that land prices in the Midwestern United States may be the latest
example of this phenomenon.
Farmland
seems an unlikely target for speculative fever. However, driven primarily by increasing
food prices, land values in the Midwestern states have dramatically increased
in recent years. And like any dramatic price increase, this has attracted the
attention of investors. This includes investors from other states and even
foreign countries. This is somewhat reminiscent of mortgage securitization in
the latest housing boom. In both cases, information surrounding the purchased
product is limited. In itself, knowledge of increasing prices draws investors,
and prices continue to reach new heights.
Those
who are investing in farmland argue that, unlike the case in the stock market
and housing bubbles, there is a good reason for increasing land values in the
region: food. The demand for corn and the region’s other agricultural products, they contend, should continue to increase along with the population. Skeptics,
however, maintain that land values cannot continue to increase at their current
rates.
The
article, unfortunately, does not account for two important features of this
debate: the role of government in the formation of this bubble and the
historical context of farmland investment. Farm subsidies must play an
important role in inflated land values in the Midwest, which could also be
compared to government policies that inflated housing prices (such as the
mortgage interest deduction) in the lead up to the recent housing bubble. It
would be nice to see this subject pursued further.
In
addition, the article failed to mention Populist reaction to farmland and
railroad investment at the end of the nineteenth century. Investors had entered
the region during that period in order to profit from the advancement of
railroads. Frustrated with outside investors’ control over their regions,
Populists pushed for bimetallism induce higher inflation (since they were
primarily debtors). In order to fully deal with farmland as an “investment,”
the article should consider the historical trends of outside investment in
Midwestern lands. The authors imply that viewing farmland as a speculative investment is a new phenomenon. In reality, however, the practice has occurred before and generated important political and economic debates during that period.
As for whether farmland truly is the next bubble, only time will tell. But after reading both Galbraith's and Krugman's warnings about the dangers of speculation and moral hazard, I am skeptical about the situation in the Midwest. It seems that there is not enough evidence to justify continually-increasing land values, and thus, the prices are most likely fueled by overspeculation that will ultimately result in some form of collapse.
For
the article, see:
http://m.npr.org/news/U.S./164033857
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