Yesterday was a big day for headlines. New ethanol bill, and perhaps only coincidence, a new study out from Iowa State on the continued run up of farmland values in Iowa and Illinois. Rather than quoting them, I’ve put in some links to the stories. Hope they come through:
A person reading these two articles is likely to come away with the impression that investment in corn producing farmland is a good idea. What the energy bill appears to have put into place is an expansion of the existing ethanol production from corn (and perhaps now other non-cellulose sources such as sugar beets) from 6 billion gallons now to 15 billion gallons in the next 15 years. It will be interesting to see if new capital flows to all the existing ethanol plants that are in trouble.
On the land value front, it does indeed appear to be the case where land values continue to rise. Readers should always keep in mind the dated nature of these studies. They are usually based on data collected over the previous year, so they may not be reflective of what is happening today. But they are popular. Folks owning land in these markets who read these studies are prone to do a little math with an evaluation of personal net worth as the end game. Studies like this generate a lot of smiles.
And what is happening today is that method of sale has switched to auction sales, which in times of high demand allow for an open ended determination of the price the market is willing to pay. Several recent auction sales do support the trending increase, at least for production cropland in the Midwest. Is there an end in sight. There was until the news of this energy bill. This keeps it open ended as the market sorts it out.
As appraisers, we always look at the why. Markets are forward looking, which means “anticipation”. In this case, anticipation of even greater prices for corn and soybeans, but also anticipation this will lead to increases in land. Right now, it’s the best game in town and money is flowing in. Wildfires tend to create their own wind until the run out of fuel and the new energy bill is throwing more alcohol on the fire. From today’s perspective, money continues to flow in, so you have to expect more of everything.
Now for the paradox. Those pesky subprime markets again. As recent as just one or two years ago, the same setup we are seeing in agriculture was in place for residential markets in all sectors of the US. That same land value survey mentions “collar counties” around Chicago, where land values have dropped from $60,000 to $30,000 per acre, as residential development demand has come to a halt. Who thought that could happen?
If you have read my previous blogs, I have outlined a few things that went wrong in the subprime and general residential markets that lead to the problems. Well, it now appears to some folks in Congress that appraisers didn’t “resist enough” and are again a big part of the problem. My hope was that government would stay out of this, but that isn’t going to happen. Legislation is washing up on the shore in waves. The of the more interesting ones is Senate Bill S2452, introduced by Senator Dodd. Among other things, it’s going to REQUIRE appraisers post a bond of 1% of appraised value so borrowers who get tricked into the risky deals have a recourse for damages?
Is there a point? Yup. Land values increasing again, busting through the roof they say. Lenders want to make those loans….loan volume, fees, etc. Try to NOT appraise an ag property for what it is selling in these markets and see if you get more business! (disclaimer: I don’t do many loan appraisals, so I’m more or less an observer in this deal).
So while on one hand we are witnessing a retraction in two segments of the real estate market (residential and to some extent, commercial), we are watching an explosion in the ag segment. Rules are being written to address problems in one segment that don’t exist in the other, yet we will be held accountable to those same rules.
Yup, interesting times.
One last thing…….none of this is new. As evidence, I offer this passage from a famous, but seldom read piece of literature (circa 1840) which is essentially saying capitalists never get it right. They rush in, overcook it, the endeavor fails, they pick up the pieces and do it again, inflicting a lot of pain and suffering along the way.
“A similar movement is going on before our own eyes. Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past, the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that, by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.” *
* – From the Communist Manifesto