Alternative Outlook

US Mid-west is a “Hot” farmland market.

The words Real Estate together with “Boom” are words not heard in the USA for a least 4 ys. But, now they are being heard once again, and not about New York Apartments, or subprime Inland Empire communities in Southern California, but “Hottest” real estate market in the US is now in the Mid-west, and it is agricultural farmland.

The reason is that as the Global food commodity prices continue their rise, the Midwestern farmers are enjoying a upsurge that is triggering a rise in the price of farmland, leaving estate agents, farmers and their bankers joyous.

The Federal Reserve Bank of Chicago calculated last month that in the region, that include Iowa, Illinois, Michigan, Indiana and Wisconsin, agricultural land prices rose 12% in Y 2010.

That was the 2nd highest increase in 30 yrs, and in real contrast to flat and/or falling real estate prices elsewhere in the USA.

For example, investors bid up prices in an auction last month for 120-acres of farmland in Greene County, Iowa. The winning bid offered $8,200 an acre–nearly $1 million, which was 44 percent higher than the $5,701 per-acre estimate for average values in the county.

Sheila Bair, Federal Deposit Insurance Corp chairperson, warned in October that a bubble may be forming in farmland real estate. But that hasn’t seemed to turn away investors.

Analysts predict farmland prices will continue to climb. Values in Iowa, which is the largest corn and soybean-growing state, climbed 16 percent in 2010 and are expected to increase another 10 percent this year if commodities remain at current levels.

Bankers are saying that in in some spots of the US Heartlands, land prices are rising at an even faster pace, as local farmers, and investors bet that soft commodities will continue to rise in Ys 2011 and 2012, due to a divergence between agricultural supply and demand a politically sensitive trend in Y 2011, not just inside the USA, but on the geo-political stage.

Food price inflation appears to be a Key factor behind social unrest in the Middle East. And even inside the US, the issue of food inflation is starting to bring on some political uneasiness, as households contend with high unemployment, and flat wage trends. What makes the issue politically sensitive is that these price pressures are likely to get worse, not better.

The US Department of Agriculture warned at its annual conference in Washington last week that nominal farm gate prices would hit a record high for Corn, Wheat and Soybean in the crop year that begins with the Y 2011 harvests, even as farmers rush to plant more crops.

That will push consumer food price inflation inside the US to about 3 to 4% or more in the 2-H of this year as the shortages moves along the supply chain, according to Joseph Glauber, USDA chief economist.

Some economists are cautioning that, outside the USA, consumer prices are expected to jump far higher.

While this up trend may be bad news for consumers, it is turning many US farmers into “Winners” thought not in a way that the Country’s diplomats or politicians wish to acknowledge abroad.

Egypt, for example, is the 8th largest export market for the US because it consumes a huge amount of Wheat, and the Middle East as a whole is a Key source of demand for US agricultural exports. So, the fact is that rising bread prices in Cairo go hand in hand with higher land prices in the US Midwest.

Some regulators in the US are now expressing fear that an excessive rise in the Country’s agri-land prices might eventually be de-stabilizing for America too.

Sheila Bair, Head of the Federal Deposit Insurance Commission, observed, the last time that US land prices rose so dramatically, in the 1980’s, that “Boom” was followed by a dramatic “Bust.” “This land price situation will continue to require close monitoring,” Ms. Bair warned.

The US agricultural lobby insists that a similar “Bust” is unlikely this time, since leverage levels are relatively low.

The US FDIC fears that any rise in Key interest rates or fall in land prices could hurt the Country’s 1,600 farm banks.

—Paul A. Ebeling, Jnr. www.livetradingnews.com