Is Agriculture Facing A Bubble?

Corn and soybean field

Today, the world of agriculture, especially Midwest agriculture, which is dominated by the three major row crops (corn, soybeans and wheat) is once again experiencing record or near record crop prices, with corn reaching close to $8 per bushel in June.

Recent sales of high productivity farmland in Iowa and Illinois have reached $11,000 to $13,000 per acre, reflecting a near doubling of prices in four to five years. Additionally, with annual farmland rental agreements up for review and renegotiation, there are some farmers that have been willing to sign four-five year contracts at $300 to $400+ per acre, which is consistent with the view of some farmers that corn prices have reached a new plateau of $6 to $7 per bushel.

It isn’t too long ago, during 2006-08, that agriculture, especially Midwest agriculture, faced what could be called “Ag Bubble 1.0.” During 2008, corn prices on the December futures market reached $7.96 per bushel, November soybean prices reached $16.35 1/2 per bushel and July Chicago wheat prices reached $12.72 3/4 per bushel. As is well known today, driving factors were: Tightening global grain supplies, reflecting the growing worldwide demand for grains, especially from developing countries, and adverse production shortfalls due to droughts in major grain producing areas; the dramatic step-function increase in grain/oilseed demand starting in 2006 from biofuel demand, whose price impact was amplified by the dramatic rise in world oil prices; the positive impact of the decline in the value of the U.S. dollars on foreign demand; and the growing impact of financial speculation in commodity markets. In 2008, many Midwest farmers reaped record per acre profits as prices surged above cost increases.

It was clear as early as the summer of 2007 that an ag bubble was forming, and that there was a strong likelihood that it would pop in 2008. Crop prices peaked in 2008. Record profits per acre were short-lived and dramatically declined due to the ensuing farmgate cost/price squeeze. Crop prices fell at the same time that many costs, notably seed and fertilizer, were still escalating. The dramatic reversal of fortunes for farmers’ bottom lines occurred even before the U.S. felt the full effects from the “Financial Armageddon” that gripped the U.S. and the world, starting in the fall of 2008.

Historical Perspective On Bubbles

The volatile events of 2007-09 are history. But today, a major question has spread from farmers’ morning coffee shop talk to the agricultural tradepress to the major financial newspaper around the world is — “Is Agriculture Facing a Bubble?”

The answer to this question, and — if so, whether the bubble will continue to inflate, deflate slowly over a number of years or pop in a dramatic fashion over the next year — is critical to farmers’ and ag input suppliers’ bottom line. Equally important will be the ripple effects on all the players in the broad supply chain who provide inputs, technology, machinery and services to the farmgate, including ag dealers/distributors and the basic suppliers of crop inputs.

Through the annals of time, human behavior — over-optimism and herd-mentality — has led to market and speculative financial bubbles, reflecting unsustainable price increases that dramatically overshoot fundamental or intrinsic values. Unfortunately, all the bubbles burst, with many having devastating market and financial consequences. In 1996, Alan Greenspan, former chairman of the U.S. Federal Reserve, coined the phrase “irrational exuberance” to describe over-optimism and the excessive escalation of asset values.

History creates perspective, especially when you hear “this time is different.” Looking back at history, financial and market bubbles have been surprisingly common. For example, during “Tulip Mania” in Holland during the 1630s, the price of tulip bulbs reached abnormally high levels. Nearly a century later, the “South Sea Bubble” occurred in 1720, during which British speculators drove up the price of the South Sea Co., which was formed to fund British government debt, in return for payments reflecting a monopoly on trade from the South Sea (Central and South America). More recently, the “Dot-Com Bubble” inflated during the mid-to-late 1990s as investors chased the IPO’s of a new generation of Internet-based companies and popped in 2000. Today, the U.S. economy is still suffering from the bursting of the “Housing Bubble” starting in 2007.

Many times, it is difficult to gauge whether escalating prices and asset values tied to improving market fundamentals reflect the development of price or asset bubbles, resulting from over-optimism and the psychology of crowds. Clearly, the recent resurgence in crop prices, starting in mid-2010, and continued dramatic escalation in farmland values reflect well understood basic fundamentals: Tight U.S. and global grain supplies tied to the impact of weather-impacted production constraints in the U.S. and other large global grain producers, on top of the continued increase in global food demand, led by the insatiable appetite of China, and the impact of the continued decline in the value of the U.S. dollar on global grain demand.

In addition to basic supply/demand fundamentals, the upwards escalation in ag price and asset values are also being driven by a dramatic increase in investors/speculators interest in ag commodities and farm assets, driven by the goal of investment diversification, as well as global investors growing appetites to invest in commodities through the proliferation of commodity ETF’s (Exchange Traded Funds). Commodity markets have become the victim of “financialization.”

The question is simple: Is the resurgence of major grain/oilseed crop prices to new highs and record Midwest farmland value a new normal or are they symptomatic of “Ag Bubble 2.0.” which could deflate, possibly resulting in a dramatic decline in crop prices and farmland values? Timing of the peak crop prices will critically depend on the size of the U.S. harvest this fall, given the uncertainty of severe weather impacts during planting and the current growing season on acreage and yields in many of the key U.S. growing areas, as well as other major grain/oilseed production areas of the world.

AgInnovation Advisors has raised the number one issue facing farmers and production agriculture today: “Is Agriculture Facing Ag Bubble 2.0?” Forthcoming articles will deal with an answer to this question.

Leave a Reply

State of the Industry Stories

Fertilizer Tender close-up
MicronutrientsHow Micronutrients Fit Into 2017 Fertility Plans
January 10, 2017
Where do micronutrients stand going forward in fertility plans? For one thing, Tim Mundorf, Field Representative with Midwest Laboratories, says Read More
Fertilizer application
State of the IndustryCautious Optimism On Fertilizer In 2017
January 10, 2017
What kind of fertilizer rates are growers and retailers looking at in 2017 and beyond? According to stakeholders CropLife magazine Read More
Asmus Farm Supply crop protection products in storage
State of the IndustryCrop Protection Products Market: Complexity Begets Opportunity
January 10, 2017
While other key market segments in agriculture continue to see tumultuous shifts in sales volumes going forward (large equipment sales are Read More
Pioneer corn seed in storage
Special ReportsState Of The Seed Industry: Better Later Than Never
January 3, 2017
Traditionally, the majority of the nation’s grower-customers made their seed planting decisions in the late fall. Normally, when folks attended Read More
Trending Articles
Iowa waterways
Stewardship2,600 Iowa Farmers Commit $8.7 Million to Water Quality Practices
August 9, 2017
Iowa Secretary of Agriculture Bill Northey announced Tuesday that a record number of Iowa farmers signed up to install nutrient Read More
Greg Musson, Gar Tootelian
CropLife 100Cause of Gar Tootelian Fire Under Investigation
August 7, 2017
Over one hundred firefighters and equipment responded to a four-alarm shop fire at the Gar Tootelian, Inc. (GAR) facility in Read More
Rob Versprille
ManagementCeres Solutions, North Central Co-op Merger to Bring New Opportunities for Indiana, Michigan Farmers
August 1, 2017
More than 40,000 customers and almost 9,000 Indiana and Michigan farmers will begin doing business with the new Ceres Solutions Read More
CPS-Norwood-and-Dupont-reps
Eric SfiligojA Message to Ag Retailers: Do Tell Your Good Stories
July 26, 2017
As the daughter of a peanut farmer, Krysta Harden, Chief Sustainability Officer for DuPont Crop Protection, understands the importance ag Read More
Tim Hassinger Dow AgroSciences President and CEO
Crop InputsDow’s Tim Hassinger Named President, CEO of Lindsay Corp.
July 24, 2017
Lindsay Corp. has  announced the appointment of Timothy Hassinger as president and CEO and a member of its board of Read More
Stewardship‘Gonna Fly Now’ with Environmental Respect
July 20, 2017
One of the most memorable moments in movie history occurred in the Academy Award-winning 1976 film “Rocky.” Haven gotten his Read More
Latest News
RoGator RG1300B AGCO
EquipmentAGCO Opens Nominations for 12th Annual Operator of the …
August 18, 2017
AGCO Corp. has announced the opening of nominations for AGCO Application Equipment’s 12th Annual Operator of the Year. The award Read More
ManagementTravels, Mergers, and CropLife 100 Updates
August 18, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss recent trips they’ve taken, the latest news on market consolidation, and the 2017 Read More
Corn Seed
Seed/BiotechSeed Innovations Benefit All of the Seed Industry
August 17, 2017
Innovations from throughout the seed industry help address many of the economic, environmental and health issues we face as a Read More
SpreadersGVM to Introduce New Prowler at MAGIE
August 17, 2017
The newest Prowler in GVM’s line-up will be introduced next week at the Midwest Ag Industries Expo (MAGIE), August 23 Read More
AcreEdge bag
Seed/BiotechLandus Cooperative’s AcreEdge Seed Brand Gears Up for 2…
August 17, 2017
Growers in more than 26 Iowa and Minnesota counties are seeing field signs with a new brand name at end Read More
Engenia soybeans
ManagementCorn and Soybean Yield Forecasts Larger than Expected
August 17, 2017
The USDA’s August Crop Production report contained larger-than-expected forecasts for the 2017 U.S. corn and soybean crops. At 169.5 bushels Read More
ManagementU.S. Ag Secretary Introduces SCORE
August 17, 2017
U.S. Agriculture Secretary Sonny Perdue signed a new agreement to support new and beginning farmers. On August 5, Perdue joined Read More
CHS-FFA-Minnesota
CropLife 100CHS and FFA: A Homerun Partnership
August 17, 2017
CHS hosted the Minnesota FFA for its annual FFA night at CHS Field. FFA students, educators and CHS leadership enjoyed Read More
Greg Musson, Gar Tootelian
CropLife 100Gar Tootelian Foundation Donates Half Million Dollars t…
August 16, 2017
Students at Immanuel Elementary are looking forward to the first day of school for two reasons this year. One, they Read More
Water Drainage
StewardshipNew System Could Remove Two Water Pollutants from Ag Fi…
August 14, 2017
Algae blooms in the Gulf of Mexico use up the majority of the oxygen in the water, leading to massive Read More
Eric SfiligojThe Top 10 Crop Protection Companies, Post-Mega Mergers
August 14, 2017
Everyone loves a good Top 10 list. In fact, some prominent celebrities such as David Letterman spent much of their Read More
ManagementThe DuPont-Granular Deal, Dicamba Update, and Upcoming …
August 11, 2017
Matthew Grassi joins Paul Schrimpf for the second week in a row to talk about DuPont’s acquisition of Granular, as Read More
Soybeans weeds
HerbicidesOngoing Evaluation Key to Controlling Weeds, Improving …
August 10, 2017
As the sun bears down on record U.S. soybean acres this August, farmers keep their eyes on their fields to Read More
Young Corn Plants
Seed/BiotechMycogen Seeds Offers Novel Product to Battle Pythium, O…
August 10, 2017
After a season plagued by seedling diseases caused by cool, wet soils at planting, farmers have a new option to Read More
Corn Field
FertilizerProtect Applied Manure Straight From the Manure Pit to …
August 10, 2017
Farmers who use liquid manure to fertilize corn crops can now mix Instinct nitrogen stabilizer in their pit for easy Read More
Iowa waterways
Stewardship2,600 Iowa Farmers Commit $8.7 Million to Water Quality…
August 9, 2017
Iowa Secretary of Agriculture Bill Northey announced Tuesday that a record number of Iowa farmers signed up to install nutrient Read More
Natives-First-Purple_Prairie_Clover
Seed/BiotechLa Crosse Seed Continues Focus on Soil and Water Conser…
August 9, 2017
La Crosse Seed is doing its part to lead communication to ag retailers across the country on the importance of Read More
HerbicidesAg Secretary Perdue Comments on Dicamba Issue
August 9, 2017
Agriculture Secretary Sonny Perdue indicated to reporters this week that he would like to see the industry work out a Read More