Friday, March 4, 2011

Farmland inflation

Here is a NYT article on booming prices for Midwestern farmland. Apparently land in some places is tipping upwards of $10000 an acre. An acre can produce 200 bushels of corn, tops, which at current prices around $7 a bushel means $1400 gross income per acre. But of course we need to subtract costs for fuel, fertilizers, pesticides, etc. Often corn barely earns a profit per acre. And today's freakishly high prices will likely decrease in the future. Furthermore, it's unwise to plant corn year after year on the same land. So to me all these things indicate that it's a bad idea to pay so much for this land, because there's no way its production can really live up to the sales price. When corn prices fall, the people who've bought that land will not be able to pay down the loans they took out, or they will abuse the land in order to squeeze out a few more bushels per acre. Either way it's bad news. Land speculators and hedge funds incurring into the farmland market might profit from these ridiculous price swings, but I imagine real farmers will suffer and there will be lots of land foreclosures.

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