Minding Ag's Business

What Really Moves Farmland Values

Crop insurance payments have been too small to trigger monumental swings in farm income and land values this past decade, economists argue.

Recently, some readers of my blog have blamed crop insurance as the prime culprit for artificially boosting farmland values. They disagreed with my argument that farm profits--and farmers' universal desire to own the earth they operate--have been the main accelerator. Just to be sure, I went back to college for a second opinion.

For the record, Purdue University Economist Brent Gloy, director of the Center for Commercial Agriculture, tells me that those who blame crop insurance for inflating land markets are "flat out wrong."

Iowa land values have rocketed from about $2,000 to an amazing $8,000 per acre just since 2000, Gloy notes. Considering the state possesses 30 million acres of farmland, that's a transfer of $180 billion in paper wealth in 12 years. That's unprecedented and nearly unbelievable, especially when states like Illinois, Nebraska, North and South Dakota, Minnesota, Wisconsin, Michigan, Ohio and Indiana have notched similar windfalls.

The small contributions crop insurance has made to farm incomes over this period pale next to the real market drivers, he stressed. First, the Renewable Fuel Standard, which ignited demand for corn-based ethanol, required the equivalent of 26.4 million acres of US corn last year, Purdue Economist Chris Hurt says. China's appetite for soybean imports required the equivalent of another 21 million acres of production. The Federal Reserve's policy of near-zero interest rates only compounded those massive demand shifts.

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"There's no way crop insurance added all that wealth to land values. It doesn't even pass the laugh test," Gloy says. It's demand--especially inelastic demand for commodities combined with three subpar crops--that underpins commodity incomes and funds our current real estate mania.

Crop insurance stabilized farm incomes after the nation's flash drought in 2012, but its long-term contribution to farm incomes in corn states have been largely negligible, according to Carl Zulauf, an economist at the Ohio State University. In a recent post on farmdocdaily, Zulauf notes that net crop insurance payments (claims minus premiums) represented just 1% of gross soybean income from 2003-2012 and 3% of corn income. That's not enough to move the needle roughly 200% or 300% in states like Iowa and Illinois.

Gloy adds that crop insurance could potentially distort some markets by encouraging corn production on marginal ground in high-riskregions like parts of the Dakotas or dryland corn in the Mississippi Delta. I see that as an actuarial problem though, with increased vigilance so premiums reflect the risk the government and insurance companies are assuming.

After all, it should be no different than taking out a homeowner's policy from insurers who have implemented new guidelines after Hurricane Sandy: If you live on Long Island, it now costs about $4,000 a year to insure a $700,000 house, versus about $1,800 if that house were 50 miles inland. What's more, private insurers don't pay a dime on the first $14,000 wind loss in a hurricane. Some insurance companies now decline to insure homes built on sand dunes at all. That just means only the wealthy can afford such oceanfront properties.

Growers in the Dakotas, for example, already pay stiffer premiums than their neighbors in Iowa, but its worth making sure those rates are actuarily sound.

I'm not saying crop insurance is perfect and should be exempt from reforms. I'm just saying, it's not the major factor behind farmland inflation. I may not be able to persuade my harshest critics, but Brent Gloy says I'd pass his economics class on this.

As a reminder, keep your language clean, all your comments on topic, don't make personal attacks and don't self-promote.

Follow me on Twitter@MarciaZTaylor


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