Is farmland the next bubble? – The Globe and Mail

These are stories Report on Business is following Wednesday, Sept. 11., 2013.

Is farmland the next bubble?
A new report from BMO Nesbitt Burns looks at the stunning rise in the value of Canadian and U.S. farmland amid concerns that prices may be in bubble territory.

BMO’s Aaron Goertzen, however, concludes there won’t be a meltdown similar to the one in the 1980s.

“Farmland prices in Canada and the United States have risen explosively since the early 1990s, with dirt on both sides of the 49 parallel up triple digits even after adjusting for inflation,” Mr. Goertzen says.

“This meteoric rise has led to some hand-wringing about whether prices have become unhinged from fundamentals, but there are a few good reasons not to be the farm on another 1980s-style crash.”

Mr. Goertzen points to the gains in farm productivity in the past several decades. He also cites a rise in demand for food around the world and soaring production of biofuel that have “roughly doubled agricultural commodity prices over the past decade or so.”

Low borrowing costs have also held down financing costs.

“Over all,” farmland’s solid earning potential and low financing cost make current prices look roughly ‘worth it’ (at least at current low rates,” Mr. Goertzen says.

“Although rising longer-term interest rates will likely lead to some backtracking over the next few years, sturdier farm balance sheets should help prevent a 1980s-style cycle of plummeting farmland prices and soaring farm bankruptcies,” he adds in his research note.

“However, heightened concern would be warranted if farmland were to continue its skyward path over the next few years.”