Thursday, January 03, 2008

... toil and trouble

As the subprime mortgage debacle drags down the housing market, Barron's reports that agricultural land prices are booming across the Midwest. Analysts aren't particularly worried about a farmland bubble:

[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, 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.
Pressure from sprawl and increasing commodity prices are part of the surge in land value, but the biggest boost is the e-word:
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. More than 130 ethanol plants now operate in the U.S., up from around 80 three years ago, while the number of gas stations selling ethanol is as underwhelming as the number of drivers demanding it. Recently, construction on three proposed U.S. plants was halted amid a growing oversupply of the fuel. Hart Energy Publishing reports that U.S. ethanol inventories climbed 12% from August through September, while average prices had slid from $1.91 a gallon to $1.67.
The article looks back at the last farmland bubble in the '70s and is well worth a read.

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