The U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) released their monthly Agricultural Prices report on Friday. In part, the NASS report stated that, “The preliminary All Farm Products Index of Prices Received by Farmers in December, at 151 percent, based on 1990-92=100, increased 5 points (3.4 percent) from November. The Crop Index is up 10 points (6.5 percent) but the Livestock Index is unchanged. The All Farm Index and All Crop Index are at record highs.”

The report also included graphical illustrations of prices received for key program crops, including, corn,soybeans, wheat and cotton.

As the market price of some of these commodities ratchets upward, so does the value of farmland.

Jim McTague, writing recently at Barron’s Online, reported that, “As city slickers in many parts of the nation see the market prices of their homesteads deflate faster than a New Year’s party balloon, farmers are watching the values of their land swell by annual double-digit percentages. Nationwide, farmland prices skyrocketed 50% over the past three years, to an average of close to $2,200 an acre through August, according to the U.S. Department of Agriculture [see this graph from the article]. While that’s the latest month for which federal data are available, there’s no doubt that prices are still sprinting ahead. - Ground zero for the phenomenon could very well be Iowa, which, like a newly active volcano, sits at the center of a massive dome of rising farm and pastureland prices stretching across America’s heart and beyond, from Ohio to the Dakotas. Bidders for Iowa farmland have become almost as eager as the politicians scurrying around the Hawkeye State desperately stumping for next month’s presidential caucuses.”

The Barron’s article went on to explain that, “The catalysts in the farmland bubble are federal subsidies to ethanol producers and the belief that ethanol demand will keep rising and that China’s and India’s new wealth will keep boosting global commodity prices.

“Indeed, U.S. farmers are switching to corn from other crops, curbing supplies of food grains. Nationwide, from 2002 to 2007, the number of acres on which corn was planted rose 24%, to 86.1 million. And the energy bill recently signed by President Bush and strongly backed by both parties mandates that oil refiners eventually boost ethanol use as a gasoline additive to 36 billion gallons a year from the current seven billion gallons.

“Aided by a drought that reduced food exports from Australia, net U.S. farm income will hit a record $87.5 billion this year. Americans spent $642.5 billion on food in 2006, up 4.5%. And warnings have begun appearing in print — see the Dec. 8 issue of The Economist — on TV and online about the end of ‘cheap food.’”

However, with respect to a potential “bubble” in the U.S. agricultural economy, Mr. McTague explained that, “Many flush farmers are reinvesting their gains in additional acreage. This means that the market isn’t nearly as leveraged as was residential real estate, says Iowa State’s Duffy [Mike Duffy, an economics professor at Iowa State University], and so is less prone to becoming a bubble. Furthermore, farmers can lock in profits on futures exchanges at current prices going out two or three years. Indeed, 2008 futures for corn, soybeans and wheat reached new highs in late-fall and early-winter trading.

“Investors are so sold on this story line that they still are buying farmland in water-starved areas of Georgia. ‘People still strongly believe that land is a good investment,’ says Ben Hudson of Hudson and Marshall Auctioneers in Atlanta. ‘The drought had no adverse impact on prices.’

“Bruce Babcock, another Iowa State economist, e-mailed Barron’s that the passage of the ethanol provisions in the just-signed energy bill assured him that there is no bubble building. He went out and bought some corn acreage himself.”

Nonetheless, the article did state that, “But the case for farmland isn’t airtight.

“In fact, some smart money that invested in Iowa farmland in 2000 is bailing out, happy to have made a profit. According to Duffy, 56% of Iowa farmland was owned by farmers from 2000 to 2005. The other 44% was owned by investors. The split today is 60% farmers and 40% investors.”

Another important variable to consider is the “shaky economic underpinnings” of the ethanol surge; according to the article: “Without government subsidies, ethanol makes no sense, he [Steve Leuthold, chief investment officer of Leuthold-Weeden Investment Capital in Minneapolis] maintains. And the subsidies could disappear because of a backlash against costs of producing the fuel — higher supermarket prices and huge demand on water supplies. The measure was opposed by groups representing the world’s undernourished and by competing agricultural interests like the National Cattlemen’s Beef Association. Big Oil dislikes the program, too, and Big Oil has deep pockets to lobby Congress.”

In part II of his Barron’s article, Mr. McTague noted that, “The rush for ethanol is easily the biggest factor behind rising farm prices. And a glut of ethanol could develop quickly as more and more farmers try to get rich quick by switching production to corn. In fact, the glut may be here.”

After additional analysis, the article indicated that, “What else could spoil the ethanol story? Ken Green, a scholar at the American Enterprise Institute, says a significant decline in oil prices would burst the bubble. Scientific breakthroughs could hurt, too. Duffy says the $64,000 question is whether efforts to produce ethanol from seaweed will succeed.

“Ethanol, of course, isn’t the only force pushing up farm prices. A global commodities boom has been under way for several years now, lifting prices for a broad variety of foods. But contrary to the assurances of farmland promoters, demand for food isn’t endlessly elastic. Food expenditures in the U.S. dropped three times since World War II — in 1974, 1981 and 1992, years when consumers were pinched. At some point, possibly soon, rising prices for some crops will trigger declines in per-capita consumption,” the article said.

For more on the price of crude oil, AssociatedPress writer John Wilen reported on Friday that, “Oil’s run to nearly $100 a barrel this year jacked up the cost of travel, clothing, beauty products and milk, and many analysts think fuel prices will remain at historically lofty levels throughout 2008.”

The AP article added that, “Other factors will also keep a relatively high floor underneath prices. Demand is expanding in China, India and the Middle East. And political upheaval in oil-producing countries such as Iran, Iraq and Nigeria have sparked worries about possible supply disruptions. These concerns have prompted banks and hedge funds to make big bets on oil.

“Several analysts have boosted their average oil price forecasts for 2008 –$75 a barrel is a common prediction. And many expect tight domestic refining capacity to push gasoline prices higher in the spring, possibly threatening last May’s record of $3.227 a gallon.”

Meanwhile, in other news regarding farmland values and farmland ownership, Bill Hord, writing on Christmas Day in the Omaha World-Herald, reported that, “Increasingly, land ownership is less about sentimental attachment and more about the money. This diminishing of sentimental attachment is the result of trends in agricultural economics and ownership, according to land management specialists.

“First, there is more money to be made on the farm than ever before, according to U.S. Department of Agriculture income statistics.

“‘If I’ve got this asset and it’s been chugging along grossing $300 an acre and now it’s $600 an acre, I’m going to take more interest,’ said Mike Duffy, an agricultural economist at Iowa State University.

“Secondly, new absentee owners have less connection to the farm.”

Later in the article, Mr. Hord noted that, “Rising prices for commodities and land, and resulting lease negotiations, have created a tension between tenant farmers and the landowners, say farm management specialists.

“Rental rates for land in eastern Nebraska with center pivot irrigation systems, for example, increased by 12 percent in 2007 and are expected to go up between 10 and 15 percent in 2008, said Bruce Johnson, an ag economist at the University of Nebraska-Lincoln.”

And near the article’s conclusion, Mr. Hord stated that, “Where there is tension, the current economic environment might bring it out. Ethanol plants’ demand for grain has quickly driven prices for corn and land to new heights.

“‘We are in a period of massive adjustments, figuring out if ethanol is going to stay,’ said Terry Kastens, a Kansas State University farm management specialist. ‘We all pretty much know rents are going to rise and rise quite a lot.’

“Cash land-rental contracts that sometimes were good for three years have led to windfall profits for some farmers. In some cases, tenants have given bonuses to the landowners, so they can share the extra profits, and have offered to renegotiate contracts early.

“Crop share contracts, under which tenants and owners share the expenses and the crops, are less problematic during volatile times, Kastens said.”

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Interestingly, none of the articles on the farm economy and land values included in today’s update highlighted the Farm Bill.

Certainly there is much more to the Farm Bill than Title I commodity payments, but politicians in rural swing districts worried about a Farm Bill veto can always remind their constituents about the Energy Bill, ethanol, high commodity prices and a robust farm economy. Some of these alternative talking points weren’t available when President Bush signed the last Farm Bill.

For related coverage, see this FarmPolicy.com update from Monday, “Bigger Impact on Agriculture: Farm Bill or Energy Bill?”

Keith Good