Farmland Boom and Bust

0:00Now my talk today is about booms and busts in farmland, and of course for me I have to start this story back in my hometown of Abilene, Kansas, with a guy named Conrad Liebold. And Conrad Liebold was a guy who sold his farm in 1868, and after he sold his farm in In 1868, he was looking for a place to settle, and he considered a number of locations, and after considering soil and climate and various factors, production, prospective development, he settled on Abilene, Kansas.

0:47So in 1869, he and his partners bought the town site of Abilene, Kansas, and Lee Bold began selling land through his partners, through an entity called National Union Land Office. Now you have to recognize that at this time, Abilene was the railhead for the Chisholm So, you had had three million long-horned cattle driven up from Texas to Abilene. And in fact, Abilene, there was 200 bars and saloons on Texas Street.

1:34And imagine the day when 5,000 cowboys were paid on the same day. A lot of weeks worth of wages, months worth of wages, of driving cattle, 5,000 of them paid in one day. It was a rowdy town, so to speak. Now Texas Street I think today is Southwest Second and you would have a hard time getting a drink stronger than 3-2 beer on that street. In the day, it was pretty rowdy, but when Leopold bought it, it was really at the tail end of the trail, the end of the Chisholm Trail. Three years later, after being in the land business and selling land, he and some partners, they sold that business and they bought the two banks in town.

2:29The Kellogg Newman & Company business and the W.B. Clark & Company. So in this thriving town of Abilene, Kansas, these guys decided to do the smart thing, go into the banking business. And about that time, unfortunately, Leibold's first wife died. And she died in 1875, and so he sought to get another wife in 1877. Well, when you have a new wife and you're bringing her from back east, what's the first thing you have to do? Guys know what you have to do. You have to build your house. And so, he went about the business of building a mansion, what is known today as the Lee-Bold Mansion.

3:19Unfortunately, you can't tour it anymore. A private owner bought it last fall. But this was an spectacular mansion of 23 rooms. In fact, there's a number of mansions in Abilene, Kansas because of its unique location at the end of the Stratisum Trail. They spent $18,000 building this mansion. And the house was completed in 1880. And he wanted to show his new pride that Abilene was not It's not the end of the world in this place where you had all these rowdy cowboys. It was civilization and he was going to prove it by this big house that he bought.

4:05But of course by that time the farmers had come in and the cowboys were on their way out because the town people got tired of the rowdiness. But this was very much a boom time for agriculture. I mean, we think of boom time in agricultural today. There was a big boom in agricultural. And consider that agriculture was half the economy at this time or possibly more. It really took over the whole country. The Chicago Tribune editorialized about this, about this over-optimism between 1879 1879-1881, and they wrote, why is it that at such a time as that, funds are contributed by all classes of people for almost any enterprise whose promoters promise great returns? It is because they see business active all around them, people in enterprises already established, winning large profits and everything apparently inviting them to be rich. They are seized by the craze of money-making and become incapable of reasoning on any project that is presented for their consideration.

5:27It is easy for unscrupulous men to humbug them at such a time. Even the promoters of enterprises often believe in the lies they tell and partake of the prevailing mania. It is appalling to consider how many of the corporate enterprises of the country have secured their capital by taking advantage of these investments or rather speculative epidemics. Now, they're really talking about the agricultural economy here. In fact, Bankers Magazine at the time thought that the country had been on a big speculative drunk, as they described it, for all this time.

6:13So, in Abilene, Kansas, and the surrounding Kansas farmland, during the period 1881 to 1887, farmland reached $200 an acre. Now that doesn't sound like much, but $200 an acre, see you will, $200 an acre equates to $4,800 today, and as I'll talk about later, today the same Kansas wheat land sells for $1,500 an acre in today's dollars. So that shows you what a huge boom was taking place between 1881 and 1887.

7:02And the other thing that happened was that, and the reason for this boom was that nature had been kinder to that area of the country than it ever had been before. It rained on the prairies, crop yields were higher than they'd ever been before. Many thought that this was unsustainable, but the farmers were looking to cash in, and also the railroads. Between 1880 and 1887, Kansas doubled the number of mileage of the railroad lines. The same decade, railroad mileage quadrupled in Nebraska. It rose 11 times in the Dakota Territory. So what we have here is farmers not only having bumper crops, but they had rail service like they never had before.

7:51I mean surely this wasn't a cyclical boom, this was something that's going to last forever. We've got the railroads, we've got the weather, we've got great ground, this will go on forever. In fact, investors thought so. Not only did they rush to buy up the ground, but they also drove out to lend money on it. Mortgages on these western farms were considered to be much safer than mortgages on eastern property. Partly because of the expectation of good yields, but largely because of a bubble mentality it set in. Western farmland looked like such a sure thing, everybody wanted a piece of the action, either a section of the land or a derivative of it, a mortgage on it.

8:45So typical of a bubble, what begins as a little ends up as too much, and it wasn't long before investors had overbought the Western lands and farmers had overproduced the grains that How we're supposed to support those mortgages back in 1881. So in 1881, you could sell bushel of corn for 63 cents a bushel, however, by the end of the decade, you couldn't get half that much. In 1887, the weather, which had been so good, so unusually good, came to an end and became Unusually Bad, a 10-year drought began, in which crops fell about every other year.

9:37So it wasn't a new era, and as crops withered, so did the mortgage market. And in the last three years of the decade, mortgage lending fell to only 10% of the previous three years' activity, 10% of the number of mortgages fell by 90%. The land prices fell, farmers went bust, they handed over their land to the mortgage holders who by then really didn't want this land at all. And the farmers themselves left. They went to California, or they went back to the Mississippi Valley. So those who think the prices always go up might want to take note of this.

10:25Today, as I said, Kansas Farmland sells for an average of $1,500 an acre. And it's doubled to that point in the last five years. But adjusted back to 1880 prices, that's only $63 an acre, which was less than a third of the prices set 125 years ago. So as big a boom in Kansas Farmland has taken place in the last five years, it's nothing compared to the 1880s. So you might wonder about Conrad Leibold. What happened? Did the happy couple live happily ever after? You know, his new bride in the big mansion, the big 23 room mansion that he built.

11:12Well, no. Leibold's financial empire crumbled. The crashes in farmland led to the failure of the bank, and in 1889 he was forced to turn the house over to creditors. And a gentleman named George Sterle bought the mansion at sheriff's sale for $4,400. So the huge mansion he built for $18,000 went for a fraction of that just nine years after it was completed. If you go through western Kansas, panhandle of Oklahoma and Texas, you'll drive for miles without seeing a tree, I mean, it just looks like it's what author Timothy Egan calls a no man's land, and that's because there's only 20 inch annual rainfall.

12:19Really that land was created for, you know, buffalo grazing, and that was about it. But in 1914, 53,000 families stick their claims into great plants, living in sod huts that The first World War began. The dryland farmers, who enjoyed prosperity, mechanization had come into their world, they were with a new machinery, they were much more productive than they had ever been, and so they were terribly efficient at this time.

13:22And then the Turkish Navy kept the Russian wheat from making its way to Europe, and the Federal Government told farmers to produce more wheat to win the war, and produced they Between 1917 and 1919, the number of acres put into the wheat production increased 70%. And why not? The government guaranteed a price of $2 per bushel. Unfortunately, the war ended, or fortunately the war ended, but it was unfortunate for the farmers. The price collapsed. There was no one to buy these mountains of wheat that lay rotting in the sun. The debts incurred to buy the equipment and the property still had to be paid.

14:10Probably some of the rents on their land still had to be paid. So what do the farmers do? And if any of you know farmers like I know farmers, they think things will get better. So they're going to keep plowing, they're going to keep planting, hoping the prices will turn around. and that's what they did. They kept plowing up the grasslands, hoping prices would improve. By 1931, 33 million acres in the Great Plains had been plowed. But the farmers could only sell wheat for half of what it took to produce a bushel of the grain. And that's if they could find buyers at all. And then the winds came, and this is a story my parents tell about the Great Depression.

15:01When I ask them about the Great Depression, they don't remember those words. What they remember is the dirty 30s, or the Dust Bowl, because they grew up in Kansas. The days on end where people had to put Vaseline in their nose just so they could breathe to keep the wind, keep the dust out of their nostrils. The Black Blizzards began in earnest in 1932. They would continue through the end of the decade. These storms would carry enough static electricity that people would avoid shaking hands. Otherwise the static electricity from that would knock a person down. There was no rain, temperatures exceeded 110 degrees, so you had more bugs appeared, grasshoppers swarmed the fields, rabbits multiplied, in fact they would have these clubbing events where they would try to round up rabbits and club them.

16:05We had centipedes by the bucket full, infesting houses, black widow spiders, tarantulas, it was just awful. Of course, the worst day was April 14th, 1935, Black Sunday. Turned out it was an unusually calm and clear day, but it would turn out to be the worst duster of all dusters. When the storm passed through Kansas, it was 200 miles wide with winds like a tornado. Daylight turned in the night and the wall of dust blocked the sun. In fact, the dust from the dust bowl actually ended up quite a ways east.

16:51Some people tell it that Washington D.C. had dust on the window sills in the Capitol building. So that was an awful end to that, what was a boom became a bust. Now in the 1970s, corn prices surged again. That's because the former Soviet Union demanded prices. The farmland shot up 30% in the mid-1970s, peaked in 79 with prices in Iowa at $1,950 an acre, that's the equivalent of $6,000 an acre, adjusted today, and the net cash yield on that land was 4.55% in 1979, so net cash yield would be the price of a rent divided by the price of the land, if you were going to to a Farmer. But that trend didn't last. Prices fell after interest rates were raised. And so the two developments together jolted the Midwestern farm belt, driving down prices nearly 30%. Net yields reached 10%. In fact, the net yields then actually more than doubled.

18:13So that brings us to today, and of course we have a big ag boom going on right now, it's called ethanol. I know Bob Higgs is going to talk about it later, but it's just like when the federal government told farmers to plant to win the war, this time Congress voted to double the production of corn-based ethanol to win out wars war, if you will. And so a third of the U.S. corn crop could be dedicated to making fuel. That's up from 7% back in 2001. Now it's speculated by some that if the ethanol subsidy was removed, price of corn would collapse.

19:02And in fact, last month, Tom Coolburn, who's a Republican from Oklahoma, has done just that. He'll be successful, but he has put together a proposal to end the 45-cent federal tax subsidy for every gallon of ethanol blended. But now we have that the price of corn is over seven bucks a bushel, and that's quite a change from the less than $2 a bushel just back in 2005. Farmers are like anyone. They'll chase a buck and they'll chase a bubble. Bill Bonner wrote a couple years ago, judged as businessman, the typical farmer would make a good veterinarian.

19:48Over and over he walks into the same trap. When prices go up, he borrows in order to expand his holdings. He buys more equipment, he leases more land, he plants more crops to take advantage of high prices follows incentives and from land prices have doubled nationally in the 2000s to more than 2300 an acre according to the US Department of Agriculture and when you look at prices in soil rich areas like Iowa and Illinois it's more than three times that area, more than three times that price. Non-irrigated cropland values soared by 10% or more in 2010 by themselves, all across the Midwest.

20:35And the net cash yields cluster around 3.5%. That's both for corn land and wheat land, corn land in Iowa and wheat land in Kansas. Remember, at the height of the boom in the 70s, net cash yield was four and a half percent. So with corn fetching $7.25, a subsidized ethanol bushel, Iowa Farmland is settling between $8,500 and $10,000 an acre. Last month, in fact, they auctioned off an 80-acre parcel in Mitchell County, Iowa that went for $10,000 an acre or $800,000 for the parcel. The acreage is only 72.2 acres tillable, so that works out to $11,080 per acre, and that is a county record, just last month.

21:33And people who were at the auction give us a little color of what happened. Farmers were bidding this up to $9,000 an acre. After that, two speculators took over. And in fact, one person said it was the slowest auction he'd ever seen, because when they got to the last thousand dollars, the bids went up in $25 increments. Now this reminds me of auctions of BLM land in Las Vegas. When the BLM was auctioning off desert so that builders could build houses in Vegas, the The big parcels would go up at a million dollar increments very, very quickly until the very end when two people would bid the last million dollars up in ten thousand dollar increments.

22:23It's the same sort of scenario. So in Kansas, as I mentioned, we've got three and a quarter bushels of wheat, we've got land prices at $1,500 an acre, and again, this is double what it was just five years ago. Now, it's thought that this bull market is on firmer ground than previous bull markets because a lot of the land is being bought for cash, and farmers are limited in their And that's because cash rents haven't caught up to the values of the property yet.

23:13This also is indicative of a bubble. You see that in all real estate bubbles. Prices go up faster than rents do. A lender told Grant's Interest Rate Observer, one of the lessons learned in the 1980s is is that rising asset values do not repay loans, right, but the underwriting of these loans depends on the interest rates that have been flattened to virtually zero by the Fed. Now cotton prices, they're also on a tear. Texas Land is fetching more than $1,400 an acre in the fourth quarter. There's been sales of $2,000 an acre recently, again, generating net cash yields to 3.5%.

24:08Arkansas Farmland soared from $2,600 an acre in 2007 to $4,000 an acre recently, and again, it's out of towners who are buying up this land in Arkansas. Real life farmers don't seem to be selling. After all, why should they? They can get three and a half percent on current value of their land. If they turn that into cash, they go to the bank, they get one percent on CD. So they're not really selling. Lack of supply, increased demand from speculators, thus prices go up. But right now, we've got prevailing And cash rent multiples that are over 27 times.

24:53Now back in 87, that multiple is less than 13 times. Rent multiples have averaged 20 times since 2001, but during that time, the price of say, Indiana farmland has doubled. In fact, land here in Indiana that fetched $1,000 an acre in 1987 is now $4,000 today. So we've had a quadrupling of land here in Indiana in the last few years. So there are a number of people concerned about this. Not the guys betting at options, obviously, but even the FDIC is concerned. Sheila Baer, she says the steep rise in farmland prices. and Bankers, and Farmers, particularly if the ethanol industry falters just as interest rates are expected to soon rise.

25:53Well, as low as interest rates are, they can only rise eventually. Of course, addressing the expectation of key interest rates, hikes, an economist for Federal Reserve said that if the rates on real estate loans rose from an average of 5% today to a historical average of 7%, that would decrease the value of farmland by a third. So you'd have a two percent increase in loan rates would lead to a third of a drop in farmland prices. That was farmland prices dropping. So if we have this, and if we have a double-fisted shock of falling crop prices and increased interest rates, Then you could really have trouble in farming.

26:53So regulators, you know, they may be concerned about this, but Gary Taylor, who's a co-founder of Agracura LLC, and it's a farm investment management company, told Grantz that this time feels different, he says. He says, I've been around for a long time and it feels different than the 1980s. He says, it's been driven by demand from China and soon to be India. We've liquidated all our grain and fiber here and in the last five or six years. We don't have a cushion anymore. He said, back in the 80s, there was this mad land rush, people were leveraging all they had.

27:42He always had to worry about a bubble, but he says, an old guy like me, who's seen a couple of these things, says, oh well, agriculture always takes care of this with lower prices, and then that resolves the high land prices. But he says this time is different, different than ever before. But I would tell you, after living through a bubble myself, in housing and real estate in Las Vegas, and doing work on speculative bubbles as far back as John Law's South Sea Bubble or Tulip's back in Amsterdam, You know, they say this every time. They say that each time is different. And I'm sure this time is different, just like all the other ones were different.