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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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Is farmland going to be our next bubble?

THE COVER story in the Dec. 31 edition of Barron’s opens with an ominous warning to farmers and farmland investors.

“You’ve lived through the tech-stock bubble. The dot-com bubble. The residential real-estate bubble. Now get ready for the cropland bubble.”

The article states that the value of U.S. farms has soared in recent years, while residential real estate has slumped badly. But the farmland bubble could soon deflate, Barron’s argues.

Nationwide, farmland prices have jumped 50 percent over the past three years, according to the U.S. Department of Agriculture.

Demand for ethanol, seen as a key part of the United States’ plan to reduce dependence on foreign oil, has been a chief catalyst. So has a global commodities boom that has lifted food prices.

At the end of August, the most recent month in which USDA data are available, the average price for an acre of farmland in the U.S. was $2,200. It’s likely gone up since then. In some states, including Virginia, prices easily surpass that average.

The average price for an acre of farmland in Virginia was $5,700 at the end of August, according to the USDA. That was up 16.3 percent from the beginning of 2007.

Farmland per acre was more expensive in just eight states–California, Florida, Maryland, Delaware, New Jersey, Connecticut, Rhode Island and Massachusetts. Rhode Island topped the list with farmland going for $12,500 an acre at the end of August.

Barron’s does point out a number of factors that could make the boom in farmland more sustainable than the residential housing bubble.

Farmers are reinvesting gains in additional acreage, meaning they’re not mortgaged to the hilt. Futures markets allow farmers to guarantee crop prices two or three years into the future.

But there are other factors that should give potential farmland investors pause, the article cautions.

With so many farmers switching to corn to take advantage of federal subsidies, a glut of ethanol could develop and push down prices. Ethanol contains less energy and is harder to ship than gasoline.

Rising food prices could also lead to declines in consumption, again lowering prices. Cheaper acreage is available in farmland-rich developing nations such as Russia, Paraguay and Uruguay.

Further, the same forces that have weakened the residential housing market–including a credit crunch and a slew of buyers waiting on the sidelines to see how things play out–could effect the demand for farmland.

Time, as always, will tell.

Permalink: http://news.fredericksburg.com/businessbrowser/2008/01/06/is-farmland-going-to-be-our-next-bubble/

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