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Communications > Sustainability Plus > Posts > Spiking Farmland Prices: The Eighties Flashback that Worries One Economist

If the sight of a stainless-steel DeLorean coursing down the highway or the country pop sounds of Ronny Milsap playing on the radio are endearing reminders of the 80s, the spike in farmland prices is a troubling one, in the view of one economist.

Dr. Jim Novak not only recalls the last spike in farmland prices in the 1980s but also how this trend played out. As trends go, it's a back-to-the-future scenario he would as soon not repeat.

But that is precisely what's happening, says Novak, an Alabama Cooperative Extension System economist and Auburn University professor of agricultural economics.

In an eerie replay of the 80s, the spikes are attracting investors such as MetLife, TIAA-CREF and John Hancock. But they're also drawing the attention of the Federal Reserve, which, like Novak, fears that this may turn out to be the next real estate bubble, leading to the same tragic consequences that followed in the 80s.

Equally worrisome to Novak is how some farmers are reacting to these spikes — basically the same way they did in the 80s.

"They're using the appreciated value of their current land holdings to finance new land purchases, just like [it] was done in the late 1970s," he says.

To be sure, leveraging an investment is not such a bad thing, so long as the farmer is able to weather a bad year or two and still be able to pay off the notes when they are due, Novak says.

For that to work, though, three factors have to cooperate: prices, the weather and land prices.

"At present, commodity prices are high and if a farmer makes a crop, it's likely there will be no problem in paying on a loan," he says. "But commodity prices do change and individuals do experience crop losses from bad weather, insects and other causes."

How this trend ultimately plays out boils down to one question, Novak says: How much of the spike is being driven by speculation that ultimately will evaporate when big league investors turn to other, more lucrative opportunities.

That remains an open question, he says.

One thing is certain: There are vast differences in each farm operation's ability to carry debt through bad years — the reason why Novak is urging farmers to undertake a careful assessment of their economic bottom line before they take on added debt.

"Each individual entity should carefully evaluate what level of risk they can bear if times turn bad," he says. "It's easy to get carried away with the good times, but no one wants a repeat of the 1980s."

Novak recalls the 80's farm crisis as one of the most pivotal events of his career as an agricultural economist.

Early in his career as a "wet-behind-the-ears" farm-management specialist, he recalls advising one farmer in the midst the crisis to liquidate his assets as a possible solution to his problems.

The farmer greeted this advice with typical Texan straightforwardness, which Novak still recalls vividly some 30 years later: "Who do I sell my machinery and land to? My neighbors are in the same boat."

Novak is the first to admit that that reality is as true today as it was 30 years ago — the reason why this memory remains so vivid.

So, what happens in the next couple of years if the conditions of the '80s are repeated and the bottom falls out? How will farmers cope?

Novak, the product of a South Dakota farm upbringing, replies in his equally straightforward Midwestern fashion: "I didn't have an answer then and there still isn't a good answer to that question."