US farmland attracting investors

Investors who have never sat behind the wheel of a tractor are helping drive the price of U.S. farmland to record levels, attracted by its assumed safety following the meltdown in mortgage-related securities and excited by the potential of plant-based biofuels.

But not everyone believes agricultural land is a good long-term investment. There are concerns that it could be just another Wall Street craze - one that ends like the Internet and housing manias that preceded it.

An analysis of rents, a key measure of U.S. cropland values, suggests the returns investors can expect from farmland are not only substantially below those available in the stock market but in a long-term decline to boot.

That disconnect, between fast-rising farmland prices on the one hand and fast-falling returns from farmland rents on the other, has some growers and government officials worried that a bubble may be forming, one similar to the one that took hold 30 years ago and left rural America reeling once it popped.

Iowa Bank Superintendent Thomas Gronstal is among those concerned. 'Current agricultural conditions are reminiscent of conditions experienced in the 1970s, which led to the economic and financial collapse of the 1980s,' he said.

So although soaring crop prices make the agricultural sector look strong he warned that retreats in those prices could have an immediate and devastating effect on land values. 'If there has been too much leveraged or loaned against the inflated value of farmland, the bubble will burst and we will once again experience an economic crisis similar to that of the 1980s,' Gronstal said.

Over the past decade, the average price of an acre of U.S. cropland has doubled, according to the U.S. Department of Agriculture, from $1,340 in 1998 to $2,700 in 2007. Last year alone, average prices nationwide jumped 13 percent.

Several factors are driving the increase. Farmers are scrambling to ramp up production to take advantage of record prices for many crops, from corn to soybeans to wheat. Big city investors, meanwhile, have also gotten in on the act, optimistic that a government push to commercialize biofuels like ethanol is fundamentally altering the rural landscape.

However, investors bullish on farmland say, essentially, that things are different because the world is in the midst of an unprecedented agricultural supercycle, driven by growing food demand and wealth in the developing world and a U.S. government mandate for plant-based alternative fuels. Rents, they say, which typically lag changes in land values, will catch up.

'Purchase prices have been going up faster than rents,' said Iowa State University economist William Edwards. 'But I think we're going to see a pretty big push on rents this year.'

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