WEBVTT

NOTE Farmland Boom and Bust

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Now my talk today is about booms and busts in farmland, and of course for me I have to

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start this story back in my hometown of Abilene, Kansas, with a guy named Conrad Liebold.

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And Conrad Liebold was a guy who sold his farm in 1868, and after he sold his farm in

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In 1868, he was looking for a place to settle, and he considered a number of locations, and

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after considering soil and climate and various factors, production, prospective development,

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he settled on Abilene, Kansas.

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So in 1869, he and his partners bought the town site of Abilene, Kansas, and Lee Bold began

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selling land through his partners, through an entity called National Union Land Office.

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Now you have to recognize that at this time, Abilene was the railhead for the Chisholm

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So, you had had three million long-horned cattle driven up from Texas to Abilene.

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And in fact, Abilene, there was 200 bars and saloons on Texas Street.

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And imagine the day when 5,000 cowboys were paid on the same day.

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A lot of weeks worth of wages, months worth of wages, of driving cattle, 5,000 of them

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paid in one day.

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It was a rowdy town, so to speak.

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Now Texas Street I think today is Southwest Second and you would have a hard time getting

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a drink stronger than 3-2 beer on that street.

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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.

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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.

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The Kellogg Newman & Company business and the W.B. Clark & Company.

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So in this thriving town of Abilene, Kansas, these guys decided to do the smart thing, go into the banking business.

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And about that time, unfortunately, Leibold's first wife died.

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And she died in 1875, and so he sought to get another wife in 1877.

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Well, when you have a new wife and you're bringing her from back east, what's the first thing you have to do?

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Guys know what you have to do. You have to build your house.

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And so, he went about the business of building a mansion, what is known today as the Lee-Bold Mansion.

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Unfortunately, you can't tour it anymore. A private owner bought it last fall.

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But this was an spectacular mansion of 23 rooms. In fact, there's a number of

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mansions in Abilene, Kansas because of its unique location at the end of the

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Stratisum Trail. They spent $18,000 building this mansion. And the house

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was completed in 1880. And he wanted to show his new pride that Abilene was not

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It's not the end of the world in this place where you had all these rowdy cowboys.

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It was civilization and he was going to prove it by this big house that he bought.

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But of course by that time the farmers had come in and the cowboys were on their way out

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because the town people got tired of the rowdiness.

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But this was very much a boom time for agriculture.

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I mean, we think of boom time in agricultural today.

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There was a big boom in agricultural.

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And consider that agriculture was half the economy at this time

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or possibly more. It really took over the whole country.

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The Chicago Tribune editorialized about this,

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about this over-optimism between 1879

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1879-1881, and they wrote, why is it that at such a time as that, funds are contributed

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by all classes of people for almost any enterprise whose promoters promise great returns? It

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is because they see business active all around them, people in enterprises already established,

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winning large profits and everything apparently inviting them to be rich. They are seized

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by the craze of money-making and become incapable of reasoning on any project that is presented

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for their consideration.

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It is easy for unscrupulous men to humbug them at such a time.

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Even the promoters of enterprises often believe in the lies they tell and partake of the prevailing

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mania.

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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.

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Now, they're really talking about the agricultural economy here.

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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.

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So, in Abilene, Kansas, and the surrounding Kansas farmland, during the period 1881 to 1887, farmland reached $200 an acre.

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Now that doesn't sound like much, but $200 an acre, see you will, $200 an acre equates

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to $4,800 today, and as I'll talk about later, today the same Kansas wheat land sells for

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$1,500 an acre in today's dollars.

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So that shows you what a huge boom was taking place between 1881 and 1887.

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And the other thing that happened was that, and the reason for this boom was that nature

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had been kinder to that area of the country than it ever had been before.

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It rained on the prairies, crop yields were higher than they'd ever been before.

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Many thought that this was unsustainable, but the farmers were looking to cash in, and also

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the railroads.

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Between 1880 and 1887, Kansas doubled the number of mileage of the railroad lines.

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The same decade, railroad mileage quadrupled in Nebraska.

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It rose 11 times in the Dakota Territory.

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So what we have here is farmers not only having bumper crops, but they had rail service like

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they never had before.

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I mean surely this wasn't a cyclical boom, this was something that's going to last forever.

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We've got the railroads, we've got the weather, we've got great ground, this will go on forever.

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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.

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Mortgages on these western farms were considered to be much safer than mortgages on eastern property.

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Partly because of the expectation of good yields, but largely because of a bubble mentality it set in.

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Western farmland looked like such a sure thing, everybody wanted a piece of the action, either

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a section of the land or a derivative of it, a mortgage on it.

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So typical of a bubble, what begins as a little ends up as too much, and it wasn't long before

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investors had overbought the Western lands and farmers had overproduced the grains that

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How we're supposed to support those mortgages back in 1881.

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So in 1881, you could sell bushel of corn for 63 cents a bushel, however, by the end

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of the decade, you couldn't get half that much.

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In 1887, the weather, which had been so good, so unusually good, came to an end and became

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Unusually Bad, a 10-year drought began, in which crops fell about every other year.

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So it wasn't a new era, and as crops withered, so did the mortgage market.

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And in the last three years of the decade, mortgage lending fell to only 10% of the previous

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three years' activity, 10% of the number of mortgages fell by 90%.

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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.

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And the farmers themselves left. They went to California, or they went back to the Mississippi Valley.

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So those who think the prices always go up might want to take note of this.

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Today, as I said, Kansas Farmland sells for an average of $1,500 an acre.

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And it's doubled to that point in the last five years.

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But adjusted back to 1880 prices, that's only $63 an acre, which was less than a third of

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the prices set 125 years ago.

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So as big a boom in Kansas Farmland has taken place in the last five years, it's nothing

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compared to the 1880s.

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So you might wonder about Conrad Leibold.

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What happened?

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Did the happy couple live happily ever after?

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You know, his new bride in the big mansion, the big 23 room mansion that he built.

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Well, no.

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Leibold's financial empire crumbled.

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The crashes in farmland led to the failure of the bank, and in 1889 he was forced to

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turn the house over to creditors.

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And a gentleman named George Sterle bought the mansion at sheriff's sale for $4,400.

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So the huge mansion he built for $18,000 went for a fraction of that just nine years after

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it was completed.

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If you go through western Kansas, panhandle of Oklahoma and Texas, you'll drive for miles

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without seeing a tree, I mean, it just looks like it's what author Timothy Egan calls

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a no man's land, and that's because there's only 20 inch annual rainfall.

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Really that land was created for, you know, buffalo grazing, and that was about it.

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But in 1914, 53,000 families stick their claims into great plants, living in sod huts that

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The first World War began. The dryland farmers, who enjoyed prosperity,

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mechanization had come into their world, they were with a new machinery, they were much

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more productive than they had ever been, and so they were terribly efficient at this time.

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And then the Turkish Navy kept the Russian wheat from making its way to Europe, and the

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Federal Government told farmers to produce more wheat to win the war, and produced they

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Between 1917 and 1919, the number of acres put into the wheat production increased 70%.

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And why not? The government guaranteed a price of $2 per bushel.

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Unfortunately, the war ended, or fortunately the war ended, but it was unfortunate for the farmers.

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The price collapsed. There was no one to buy these mountains of wheat that lay rotting in the sun.

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The debts incurred to buy the equipment and the property still had to be paid.

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Probably some of the rents on their land still had to be paid.

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So what do the farmers do?

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And if any of you know farmers like I know farmers, they think things will get better.

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So they're going to keep plowing, they're going to keep planting, hoping the prices will turn around.

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and that's what they did. They kept plowing up the grasslands, hoping prices would improve.

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By 1931, 33 million acres in the Great Plains had been plowed.

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But the farmers could only sell wheat for half of what it took to produce a bushel of the grain.

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And that's if they could find buyers at all.

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And then the winds came, and this is a story my parents tell about the Great Depression.

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When I ask them about the Great Depression, they don't remember those words.

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What they remember is the dirty 30s, or the Dust Bowl, because they grew up in Kansas.

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The days on end where people had to put Vaseline in their nose just so they could breathe to

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keep the wind, keep the dust out of their nostrils.

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The Black Blizzards began in earnest in 1932.

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They would continue through the end of the decade.

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These storms would carry enough static electricity that people would avoid shaking hands.

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Otherwise the static electricity from that would knock a person down.

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There was no rain, temperatures exceeded 110 degrees, so you had more bugs appeared, grasshoppers

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swarmed the fields, rabbits multiplied, in fact they would have these clubbing events

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where they would try to round up rabbits and club them.

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We had centipedes by the bucket full, infesting houses, black widow spiders, tarantulas, it was just awful.

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Of course, the worst day was April 14th, 1935, Black Sunday.

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Turned out it was an unusually calm and clear day, but it would turn out to be the worst duster of all dusters.

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When the storm passed through Kansas, it was 200 miles wide with winds like a tornado.

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Daylight turned in the night and the wall of dust blocked the sun.

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In fact, the dust from the dust bowl actually ended up quite a ways east.

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Some people tell it that Washington D.C. had dust on the window sills in the Capitol building.

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So that was an awful end to that, what was a boom became a bust.

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Now in the 1970s, corn prices surged again.

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That's because the former Soviet Union demanded prices.

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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

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to a Farmer. But that trend didn't last. Prices fell after interest rates were raised. And

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so the two developments together jolted the Midwestern farm belt, driving down prices

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nearly 30%. Net yields reached 10%. In fact, the net yields then actually more than doubled.

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So that brings us to today, and of course we have a big ag boom going on right now, it's

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called ethanol.

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I know Bob Higgs is going to talk about it later, but it's just like when the federal

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government told farmers to plant to win the war, this time Congress voted to double the

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production of corn-based ethanol to win out wars war, if you will.

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And so a third of the U.S. corn crop could be dedicated to making fuel.

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That's up from 7% back in 2001.

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Now it's speculated by some that if the ethanol subsidy was removed, price of corn would collapse.

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And in fact, last month, Tom Coolburn, who's a Republican from Oklahoma, has done just

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that.

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He'll be successful, but he has put together a proposal to end the 45-cent federal tax

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subsidy for every gallon of ethanol blended.

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But now we have that the price of corn is over seven bucks a bushel, and that's quite

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a change from the less than $2 a bushel just back in 2005.

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Farmers are like anyone. They'll chase a buck and they'll chase a bubble. Bill Bonner wrote

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a couple years ago, judged as businessman, the typical farmer would make a good veterinarian.

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Over and over he walks into the same trap. When prices go up, he borrows in order to

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expand his holdings. He buys more equipment, he leases more land, he plants more crops

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to take advantage of high prices follows incentives and from land prices have doubled nationally

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in the 2000s to more than 2300 an acre according to the US Department of Agriculture and when

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you look at prices in soil rich areas like Iowa and Illinois it's more than three times

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that area, more than three times that price.

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Non-irrigated cropland values soared by 10% or more in 2010 by themselves, all across

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the Midwest.

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And the net cash yields cluster around 3.5%.

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That's both for corn land and wheat land, corn land in Iowa and wheat land in Kansas.

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Remember, at the height of the boom in the 70s, net cash yield was four and a half percent.

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So with corn fetching $7.25, a subsidized ethanol bushel, Iowa Farmland is settling between

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$8,500 and $10,000 an acre.

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Last month, in fact, they auctioned off an 80-acre parcel in Mitchell County, Iowa that

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went for $10,000 an acre or $800,000 for the parcel.

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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.

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And people who were at the auction give us a little color of what happened. Farmers were bidding this up to $9,000 an acre.

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After that, two speculators took over.

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And in fact, one person said it was the slowest auction he'd ever seen, because when they

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got to the last thousand dollars, the bids went up in $25 increments.

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Now this reminds me of auctions of BLM land in Las Vegas.

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When the BLM was auctioning off desert so that builders could build houses in Vegas, the

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The big parcels would go up at a million dollar increments very, very quickly until the very

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end when two people would bid the last million dollars up in ten thousand dollar increments.

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It's the same sort of scenario.

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So in Kansas, as I mentioned, we've got three and a quarter bushels of wheat, we've got land

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prices at $1,500 an acre, and again, this is double what it was just five years ago.

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Now, it's thought that this bull market is on firmer ground than previous bull markets

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because a lot of the land is being bought for cash, and farmers are limited in their

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And that's because cash rents haven't caught up to the values of the property yet.

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This also is indicative of a bubble.

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You see that in all real estate bubbles.

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Prices go up faster than rents do.

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A lender told Grant's Interest Rate Observer, one of the lessons learned in the 1980s is

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is that rising asset values do not repay loans, right, but the underwriting of these loans

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depends on the interest rates that have been flattened to virtually zero by the Fed.

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Now cotton prices, they're also on a tear.

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Texas Land is fetching more than $1,400 an acre in the fourth quarter.

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There's been sales of $2,000 an acre recently, again, generating net cash yields to 3.5%.

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Arkansas Farmland soared from $2,600 an acre in 2007 to $4,000 an acre recently, and again,

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it's out of towners who are buying up this land in Arkansas.

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Real life farmers don't seem to be selling. After all, why should they? They can get three

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and a half percent on current value of their land. If they turn that into cash, they go

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to the bank, they get one percent on CD. So they're not really selling. Lack of supply,

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increased demand from speculators, thus prices go up. But right now, we've got prevailing

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And cash rent multiples that are over 27 times.

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Now back in 87, that multiple is less than 13 times.

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Rent multiples have averaged 20 times since 2001, but during that time, the price of say,

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Indiana farmland has doubled.

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In fact, land here in Indiana that fetched $1,000 an acre in 1987 is now $4,000 today.

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So we've had a quadrupling of land here in Indiana in the last few years.

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So there are a number of people concerned about this.

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Not the guys betting at options, obviously, but even the FDIC is concerned.

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Sheila Baer, she says the steep rise in farmland prices.

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and Bankers, and Farmers, particularly if the ethanol industry falters just as interest rates are expected to soon rise.

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Well, as low as interest rates are, they can only rise eventually.

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Of course, addressing the expectation of key interest rates, hikes, an economist for Federal

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Reserve said that if the rates on real estate loans rose from an average of 5% today to

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a historical average of 7%, that would decrease the value of farmland by a third.

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So you'd have a two percent increase in loan rates would lead to a third of a drop in farmland prices.

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That was farmland prices dropping.

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So if we have this, and if we have a double-fisted shock of falling crop prices and increased interest rates,

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Then you could really have trouble in farming.

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So regulators, you know, they may be concerned about this, but Gary Taylor, who's a co-founder

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of Agracura LLC, and it's a farm investment management company, told Grantz that this

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time feels different, he says.

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He says, I've been around for a long time and it feels different than the 1980s.

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He says, it's been driven by demand from China and soon to be India.

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We've liquidated all our grain and fiber here and in the last five or six years.

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We don't have a cushion anymore.

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He said, back in the 80s, there was this mad land rush, people were leveraging all they

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had.

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He 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.

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But he says this time is different, different than ever before.

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But I would tell you, after living through a bubble myself, in housing and real estate in Las Vegas,

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and doing work on speculative bubbles as far back as John Law's South Sea Bubble or Tulip's back in Amsterdam,

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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.