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| The price of a bushel of corn (56 pounds) over the last 20 years |
If you took Econ 101 in college then you learned that prices stabilize at the point where equal amounts of capacity enter and leave production.
The price of corn is distinctly bimodal. It languished for many years around the $3.75 a bushel range with distinct plateaus around $6.50 a bushel.
The production of ethanol for gasoline "extender" is a major use of corn. The rise in price between the beginning of 2020 and 2021 may have been the market anticipating Biden winning and ending inexpensive gasoline and diesel. That simultaneously increased the cost of production AND created more demand for ethanol.
In a rational world, it should be possible to estimate the cost of an acre of land from the price of corn. Assuming 200 bushels of corn to the acre and $3 a bushel for variable production costs, the Net Present Value of (Corn Price-$3) over 20 years at 6% discounting should yield a decent first-order approximation of the price of corn ground.
Net Present Value is very sensitive to interest (i.e. discount rates with increasing rates reducing NPV) and prices (with increasing prices increasing NPV). It is also more sensitive to prices in the near future than it is to prices in the distant future.
Since one is looking into the future, the variance between what the market is paying and what NPV predicts using current prices and interest rates is indicative of what the "market" thinks about future trends.
Somewhere in Iowa
Iowa is corn country. They grow corn and do it as well as anybody in the world.
But even the most optimistic economists were stunned when a "corn farm" in Iowa sold for $30,000 an acre.
There are only two scenarios where that makes any kind of sense:
- Corn selling between $15 and $20 a bushel
- "Real" interest rates (i.e. interest rates minus inflation rate) going VERY negative.
The market isn't always right. It can remain irrational longer than most short-sellers can stay solvent.
But for me it is eye-opening that there are a couple of bidders out there who are willing to bet very big money that food and fuel prices will triple ($18/$6.5) in nominal prices in the near term (i.e. five year horizon).
Yep. If they do not quit printing money that is what will happen. Roger
ReplyDeleteThe third possibility for $30K an acre is the buyer has inside knowledge of future plans and knows they will be able to make a killing on the property.
ReplyDeleteI've read that some major players have been purchasing rural property and water rights for it. Maybe internet rumor, but then again, reality has been turned on its ear.
ReplyDeleteHave you heard of possibility of wind farm (electricity from wind mills) being erected in your area ? That could also explain this - each of those machines generate A LOT of $$$.
Wind turbines will never generate enough energy to offset the energy used to produce them.
DeleteThe $$$ they generate is in the form of your tax dollars paying the wind farm companies.
Anon 6:30 here.
DeleteI meant is that the landowner who has these machines erected on their property can glean quite a haul. I've heard (not seen but heard) of $10,000 a month PER WINDMILL is definitely possible. They don't have to own the machine, this is property rental we are speaking of here.
Good observation. This high level observation isn't something most people can do. You're up there with the Yon's of the world, Joe!
ReplyDeleteIf I take my tinfoil hat out I would ask whom paid said price? Was it a company with ties to blackrock, bill gates, or the cccp? Money is no object, pay whatever price, the land is the commodity, not the 1s and 0s in your ledger program. I paid 200 more federal reserve tissues for a canadian maple leaf than I would have if I pulled the trigger a month ago (thats 10%!) What does that kind of discount factor do to the math of what productive land is worth? The decline of the USD is a given, how are you investing yours?
Here in podunk tennessee, cleared and fenced pasture is 10-12k/acre. If you can see a lake or a mountain, its 15. Woods is worth 4-8k depending how steep the hill ('flatlanders' takes on new meaning).
I see the article says the last 2 bidders were locals. Adjoining tracts? Old grudge? Inherited money? I've seen people do stupid things to the tune of 2.1 million dollars.
I do agree however its a canary lying dead at the bottom of the cage and we're in a coal mine. We're starting to see more of those, aren't we?
Read the Richest man in Weimar Germany
ReplyDeletehttps://www.wealthplaybook.ca/post/who-was-hugo-the-inflation-king-of-1920-s-germany-stinnes
Folks that see the massive amount of overseas US Dollars coming HOME know that hyperinflation is near.
30 odd years ago, a new dairy was built right close to town. West side of the road. With the expectation the city would grow to it. Owner went broke due to other investments (gas stations). The city is now on the east side of road. Owner still probably would have been broken if they were still solvent due to high operating costs, but it was a good plan.
ReplyDeleteHow would it work if say you had $10,000 ground but sold it to the next generation for $1-$1,000 with the contract of life time support? Yes, it does put a contract on your head for someone to bump you off earlier, but it does reset the value without relying on Estate laws. Requires faith & trust in your heirs
Jerry
The high farmland prices could be for the same reasoythat hedge funds are buying houses for 30% over list - they look at short term books without thinking of long term books and assume they can push the market with high rents - a risky move in markets where prices are already high and likely to fall.
ReplyDeleteThey aren't maintaining the houses, will they use the land?
Of course, it is more likely as mentioned above that the properties were special cases of bidding wars or sought after for unique reasons.
The real (not government "adjusted") rate of inflation for 2022 was approximately 30%.
ReplyDelete$100 compounded quarterly at 25% interest for 5 years is: $336.19
$100 compounded quarterly at 30% interest for 5 years is: $424.79
$100 compounded quarterly at 35% interest for 5 years is: $535.29
This has been happening around here for years because the Amish demand for land has pushed prices over $30/acre on average and they are not even raising crops on that land, just pasture for their horses. It is impossible to buy land here that you can profitably raise row crops on.
ReplyDeleteIt can be challenging to use Generally Accepted Accounting Principles on Amish farming practices.
DeleteBecause they self-finance, the monthly-nut is subsidized.
Because they grow their own tractors (horses), does the traction device appreciate or depreciate? How do you handle the potential income stream from the colts?
Labor comes from the kids. How do you account for that. Normally labor is a cost but the kids are getting an education at the same time...a benefit.
And speaking of kids, if you knew you might have ten children, what would it be worth to you to have a way to keep them off-line and away from town and 'town kids" until they were 17? High-end boarding schools run up to $60k/year.
Almost none of the Amish around here farm for a living, there are some hobby farmers but they mostly have a "real" job and only farm for appearances. There is a lot of self-financing going on but an awful lot of standard bank loans as well, a major economic downturn among the "English" would be catastrophic for the Amish.
DeleteIf the buyer has several thousands of acres to dollar cost average (if that is the correct term) this one purchase over then they would get it financed. Not that it makes it proper. Or fiscally prudent. There is also a significant infusion of 3rd party monies into more stable assets such as farmland. Past practice was to pay a 3% annual rent to the actual purchaser of the farm. That would put the cost to rent at $900/acre. With interest rates about that no actual financial rationale to the equation for the farmer.
ReplyDeleteSo 30 million for a thousand acres, 300 million for 10,000 acres. You could stop a lot of food from growing for that much land.
ReplyDeleteWho is buying?
exactly !
DeleteTomorrow, $30,000 might only buy a big Mac, but an acre of farm land will still be valuable. If you expect inflation, the important point is to not hold dollars, but trade them for real assets.
ReplyDeleteTo quote more than one genius, they are not making more land.
DeleteAnother possibility is that the land is adjacent (or nearly so) to a hog CAFO and land is used for manure slurry spreading (disposal). Iowa and several other states and tightening soil nitrate allowances. The 'home' farm may be maxed out on allowable slurry allowed.
ReplyDeleteThose mega pig CAFO need to dispose of that slurry but they can only transport via truck only so far before it becomes uneconomical. Some of those CAFOs will lay down a pipeline and pump it up to 1/2 mile (or more?).
I think it's possible you are not seeing the full picture. There are some very hig land values for Ag land in Texas right now, as well. But the reasons for this has nothing to do with crop yield or prices. It has to do with industrialization; plans in the region for Samsung to spend billions on a new-build chip mega-factory, other plans in the area for Tesla to lay foundations for a giga-battery factory, and so on. I have 3rd generation farmer friends who spend their time saying 'no' to the ever-increasing offers - which have sailed past your $30K/acre some time ago.
ReplyDeleteConsistently made over $20,000 in income from home with the benefit of smooth playback and sticky online interest. |F330″ I actually made $18,000 with this perfect home income. Everyone can now without a doubt.. Www.jobsrevenue.com
ReplyDeleteI’m a farmer and there are a couple other things to consider in the big picture. 1) land is fungible, so it can be sold for the same 30,000 or more on any day in the future. 2) this is likely above average ground with the capability to produce closer to 300 bushels per acre consistently. 3) if I am going to farm for 30 years and the land rent cost is $1000 per acre per year, or $30,000 to buy then the cost is the same. When buying you have the land to sell in 30 years. Renting cost the same but accumulated zero additional value.
ReplyDelete