The Land Boom : Planet Money On today's show, we visit a place where global economic forces converge: Colo, Iowa. The price of farmland in Iowa has doubled in the past few years. We look at the broader economic picture, and ask: Is it a bubble?
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The Land Boom

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The Land Boom

The Land Boom

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WILL DAILEY: (Singing) We want riches, darling.


BEN BERNANKE: The recovery is close to faltering. We need to make sure that the recovery continues and doesn't drop back and that the unemployment rate continues to fall downward.


DAILEY: (Singing) Down, down the drain. When this war's over, we can get away. You won't find the love that you lost down, down, down the drain.


Hello, and welcome to PLANET MONEY. I'm Robert Smith, and we have a special guest host today, NPR's brand-new food and agriculture correspondent Dan Charles.


Nice to be here. Today is October 4, 2011. The voice you heard at the top of the show, that was Fed Chairman Ben Bernanke.

SMITH: Today on the podcast, a place where land values have doubled in just a few years, where people outbid each other for real estate, a place where owners become millionaires in a matter of minutes.

CHARLES: Are we going back to Las Vegas in 2006?

SMITH: No, we are not. This is happening today in Iowa. But first, the PLANET MONEY indicator with Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's Planet Money indicator - 20. As of this morning, the S&P 500 - that's the stock index that tracks big U.S. companies - it had fallen by 20 percent from its recent peak that it hit a few months ago. A 20 percent decline, this is the definition of a bear market. And, you know, the way stock market news coverage generally goes, the implication is a bear market is a bad thing. And, yes, it is bad in some ways, but I think there's really a strong argument that it's actually good for a lot of investors when the stock market goes down like this over a period of a few months.

SMITH: I got to say it depresses me, so make the case. Make the case that this is good for me.

GOLDSTEIN: OK, well, first, I need to know two things from you, Robert.


GOLDSTEIN: One, how old are you?

SMITH: I'm 43.

GOLDSTEIN: You're 43. OK, and do you contribute some part of every paycheck into your retirement plan, into the stock market?

SMITH: Unfortunately, I do.

GOLDSTEIN: So I'm going to say yes.

SMITH: Oh, so it's not unfortunate.

GOLDSTEIN: I'm going to say this bear market is good for you. And here's a way to think of it, right? So when you buy stock in a company, what you're really buying is a share of all of that company's future profits. So - OK, so this decline in stock prices over the past few months, it does reflect the fact that investors in the U.S. and around the world - they are definitely getting more pessimistic about those future profits. But - and this is really the key but for you and for me, frankly - this pessimism, it's all about the short term. It's about the next few months, maybe the next couple years. But, Robert, the next couple years, they are irrelevant for you.

SMITH: (Laughter).

GOLDSTEIN: You, my friend, are not going to retire for two decades or more.

SMITH: I know.

GOLDSTEIN: So what you care about is this long-long-term outlook, the 20-plus-year outlook. And this 20-plus-year outlook for corporate profits, it has not changed in the past couple of months. It's the same as it was a few months ago. And what's more, my friend, even better, you now get to buy a share of those future profits for 20 percent less than you had to pay a few months ago.

SMITH: It's a sale.

GOLDSTEIN: So it's a - it's on sale. This thing that you are buying every single month, it just got a lot cheaper. And, you know, as long as you're in for the long haul, as long as you're not about to sell, that's a good thing.

SMITH: Jacob, you sound like a motivational speaker. I want to loop this and keep this in my head because it depresses me. It does. I'm sorry.

GOLDSTEIN: Right, no, and I'm not here, like, flogging the stock market, you know? We don't talk about the market. And like, I'm not saying I know it's going to go up. But it's useful to think in this very long-term way and not get caught up in the day-to-day or even month-to-month changes.

SMITH: Got it. Thanks, Jacob.

GOLDSTEIN: Sure, thanks.

SMITH: And now on to that mysterious real estate boom we were talking about at the top of the show. We're not talking here about houses or apartment buildings or even commercial real estate. We're talking about farmland - good, old-fashioned American farmland. That's why we've invited Dan Charles here today as the agriculture correspondent for NPR. He's hanging out with PLANET MONEY for a few weeks. And we were talking when he came here about land prices in the Midwest - this meteoric rise in farmland prices over just the last couple years.

CHARLES: It really is an amazing story. Farm prices have roughly doubled over the last six years, right through the Great Recession. So the question we had was, how high can this go? Is this, dare we say it, a bubble?

SMITH: The bubble question - we love that here at PLANET MONEY. So Dan and I got on a plane, went to Iowa. And for those of you who can't quite remember what good economic times sound like, here, check this out.

UNIDENTIFIED MAN: Eighty-five and now six, now seven, now eight. And what about - what about 88?

SMITH: This is the sound of a farmland auction. Yeah, they auction everything here. They don't have those real estate websites where you can just buy whole farms on the Internet. No, no, no, they get together in a tiny little room. In this case, we're in a community center in Colo, Iowa. And you can look out the window and see this massive grain elevator. A train goes by every 20 minutes. And this is where the prices get determined for farmland in Iowa.

CHARLES: We're in the middle of a crowd. There are guys there who look like they stepped right off the combine. They're sipping Styrofoam cups of coffee. Even the bankers here are wearing jeans.

SMITH: I actually looked like the only city slicker in the room with my blue blazer and my nice shoes.

CHARLES: I felt right at home though. It took me back to my childhood. I grew up on a farm in Pennsylvania. Now, you have to know, around here, auctions aren't just a good way to get a price for a farm. They're entertainment. They're community events. So that's what brought Dwight Young (ph) to the place. He sold his land in this area for $5,000 an acre just a few years ago - $5,000 an acre. He thinks this farm could go for $10,000 an acre.

DWIGHT YOUNG: People just came out to see everybody else, see what land is worth, maybe get a little land of your own. And, you know, if every other land sell for 10,000, it gives you an idea what your stuff is selling for and what your stuff might be.

CHARLES: Up in the front of the room, I can see what all the fuss is about. There is an easel, and on it, a satellite image of the farm that's for sale - 158 acres. It's almost a perfect square, half a mile on each side.

SMITH: Now, the owner of this perfect square, Debra Ray Miller (ph) - she sits right up front. And you can spot her as the owner because she's the one that looks nauseous.

DEBRA RAY MILLER: I've been a nervous wreck since getting here. So I really wanted to kind of just hide in the back, and I ended up up front here. And...

CHARLES: One reason she's nervous - she's not even sure she's doing the right thing. This is her family land. Her grandfather got it during the Depression. But she's been hearing these stories about land in Iowa going for $8,000, $9,000, $10,000 an acre. So if this auction goes well, if her farm gets that kind of price, she could be walking away with a million dollars.

MILLER: Which is why early in the summer, we kind of stepped back and said, we really need to look at what's going on out there. And if this is our opportunity, you know, to let someone else be a guardian of this property, perhaps it's time to pass it along, so...

SMITH: So we wanted to see what this land was that everyone was bidding on, see what a farmland bubble might look like in person. So we found Debra's real estate agent, Bill Vogel (ph). And we got in our cars, and he led us down this county road. He took a right at the silo, if that helps, and there it was. And I got to be honest with you. This farmland looks exactly what you think it looks like - corn stalks, dirt. That was it. Yeah, you will pass a million of these farms driving from Chicago to Nebraska. But the real estate agent, Bill Vogel - you should hear him talk about this land.

BILL VOGEL: This is a fantastic piece of ground. You know, this is as good as I ever get to sell.

CHARLES: So what's good about it? Bill Vogel decided we needed to take a really close look. So he gets down, he picks up a little piece of that soil so we can inspect it, and he tells us that the secret to the value of this soil is a story that started, say, 10,000 years ago when glaciers covered this part of Iowa.

VOGEL: When the glacier left, the prairie grasses took over, and that's why this is so black, 'cause those prairie grasses put fantastic roots in the soil. All those roots decayed in this soil, and now it's as black a soil as you'll find anywhere in the world.

CHARLES: That blackness is a signal that this soil is really, really fertile. So what does that mean? It means big harvests.

SMITH: Yeah, but this has been true for thousands of years. I mean, nice, rich, dark soil does not explain the boom in land prices all of a sudden. Glaciers do not create a bubble. So what does explain it? Well, it turns out there are global economic forces far from Colo, Iowa, forces that are changing life for everyone here in the Midwest, forces that are compelling a bunch of guys in a community hall to push this price of this land even higher.

UNIDENTIFIED MAN: Now 80. What about eight? What about 8,000? You can all...

CHARLES: OK, let's start with global force number one.

SMITH: Number one.

CHARLES: Number one. A guy who is not in the room, who does not even own a pair of overalls - at least that we know of - we heard his voice earlier - Ben Bernanke, the Federal Reserve chairman.

SMITH: Ben Bernanke has pushed down interest rates in this country so they're close to zero, and that's a big reason why all these farmers showed up today. I mean, it's easy to borrow money to buy land. And more importantly, these farmers have extra money in the bank, and it's probably earning no interest at all from those crappy savings accounts.

CHARLES: Land is better. Think of it as a high-yield savings account. You buy it, every year it gives you something back. But instead of interest, it gives you a different kind of yield. It gives you corn. You can make roughly, let's say, a 4 percent profit on your money each year these days if you have nice farmland in Iowa.

SMITH: OK, so we accept that farmland is a good investment, but here's another reason. Reason number two, global force number two pushing farm prices up so quickly - this global force became apparent in the middle of the auction.

CHARLES: I'm standing in the back of the room with Bruce Babcock. He's an economist at Iowa State University. It's quiet, and he points to some people right ahead of us. And they're staring at their cellphones.

BRUCE BABCOCK: They're checking the corn price today, these guys right here.

CHARLES: Do you know is it up or down?

At this point, he pulls out his own BlackBerry.

BABCOCK: It's down. Corn is down a lot - 40 cents down.

CHARLES: Now in plain English, this is bad. Forty cents is as far as corn prices are allowed to drop in one day.

SMITH: See? It's all about the corn prices, baby. Global force number two pushing this farmland boom is - you know, except for days like this one - is corn prices have gone gangbusters over the last few years. That's what Bruce Babcock told us in the morning.

BABCOCK: In the Midwest, most farm land is corn. And soybeans is there primarily so that you get a better corn crop the following year. So corn is king. And so what drives farm profitability is the amount of money you can make off growing corn.

SMITH: So as if on cue, talking about all these corn prices, all of a sudden, there is this problem at the auction. Remember how everyone thought that this land should bring around $10,000 an acre? Well, the bidding is stalling at under $8,000 an acre, $2,000 less than they expected. I mean, it seemed to me that everyone was looking around nervously all of a sudden.

UNIDENTIFIED MAN: There's tile maps in the back. You've got good natural drainage. Get right in. Help yourself - 7,900, asking 8,000. Eight thousand, anybody? What about eight? What about eight? What about 8,000? Seventy-nine hundred. Eight thousand? What about eight? What about eight? Who said 8,000? What about eight? I think we'll just take a little break right there.

SMITH: The auctioneer stops the auction. And they take the owner Debra Miller into a back room to talk about how low of a price she's willing to actually accept here. And you can imagine the dilemma for her. I mean, she's heard nothing but news about record land sales all across Iowa. And now, all of a sudden, maybe she chose a bad day. Maybe she chose a day when corn prices are in the tank.

CHARLES: Although another farmer came up to us and told us not to worry. This is all theater and show. They always do this to build up the tension, he said.

SMITH: Yeah. I mean, in the big picture, 40 cents down on corn prices is not that big a deal. Now, let's leave the auction for a moment and talk about corn prices. Corn prices are still by all measures incredibly high. And I'll tell you right now this is not because of the demand for cornflakes.

CHARLES: No, no. The price of corn - it's not going up and down because people are eating more or eating less. No, the third reason...

DAN CHARLES AND ROBERT SMITH: The third global force.

CHARLES: ...The biggest one of all, the biggest reason for a boom in corn and a boom in land - it's the Arab sheikhs who run OPEC. Oh, yes, and all of us who drive cars. Here's the thing - oil prices drive corn prices.

SMITH: OK. We're going to break this down for you. Corn is nothing but a vehicle for starch and sugar. I mean, they use corn to make cows fat. They use corn to make people fat - high-fructose corn syrup.

CHARLES: But where there is starch and sugar, you can make alcohol. Another word for alcohol - ethanol, which you can burn in a car engine and is, in fact, added to gasoline these days. You put it in your tank. In fact, this year, for the first time, more American corn will go into ethanol factories than feeds domestic farm animals.

SMITH: And Bruce Babcock says that if you own a farm in Iowa these days, you are basically in the energy business.

BABCOCK: When gas prices go up, it suddenly becomes profitable to take those sugars - and instead of feeding them to livestock, it makes them profitable to convert it into ethanol.

SMITH: So you can see why this explains the land boom. I mean, you may have noticed the price of oil has gone up over the last five years. And it exactly corresponded with the prices of farmland.

CHARLES: Now, it did not hurt that the official U.S. government policy is to encourage ethanol use. They even subsidize it. The companies that make ethanol get 45 cents in tax breaks for every gallon of ethanol they make. Not too shabby.

SMITH: Yeah. That's about $6 billion a year from the U.S. federal government propping up corn prices and land prices. So let's recap this whole thing. The boom in land prices - this supposed bubble is fueled by, one, Ben Bernanke keeping interest rates low; two, grain traders keeping corn prices high; three, government subsidies for ethanol - it doesn't hurt; and oil companies grabbing every dollar they possibly can. Voila, that makes an economic boom.

CHARLES: And if you look at all the reasons for that boom, this does not look like a bubble. These are real economic forces at work. And these are compelling reasons for farmers to buy land. In fact, those reasons are so compelling our economist Bruce Babcock, he bought farm land himself - a beautiful tract of a hundred acres in northern Iowa.

BABCOCK: It is beautiful if you like flat, black dirt. It's a hundred-acre rectangle of land off a gravel road.

UNIDENTIFIED MAN: Eighty-five, and now six and now seven.

SMITH: Back inside the community center, everything has changed. The auctioneer announced that the seller was not willing to accept any of those lowball offers she got before. And immediately after that, the bids started to pick up. I mean, the bidders were just playing hard to get the whole time.

CHARLES: And 20 minutes in, I can see the last two bidders. There's a tall guy with a beard in a plaid shirt. When he wants to bid, he winks. And then there's a short, round fellow in overalls. He's muttering constantly into a cell phone. And he nods slightly when he wants to raise the price.

SMITH: And it goes back and forth and back and forth until...

UNIDENTIFIED MAN: Got 99. Give me a quarter. Ninety-nine. Now a quarter - 99 25, 99 25, 99 a quarter.

CHARLES: Overalls man closes his cell phone, shakes his head. He's out.

UNIDENTIFIED MAN: Sold - $9,900. Thanks to everybody for your interest in the farm. And if you have any interest in selling a farm, we'd be glad to visit with you.

SMITH: Nine thousand, nine hundred dollars, just a hair below $10,000 an acre. Up in front, the owner, Debra Ray Miller - she looks shell-shocked? Ninety-nine hundred dollars an acre times 158 acres - she's made a million and half dollars in 20 minutes. But I've got to be honest with you. She does not quite seem like she has wrapped her mind around this yet.

MILLER: I've certainly been advised that, you know, these auctions really were based on what's happening on Wall Street, what was happening in Greece and halfway around the world. So, yeah, I started not watching the news this week because it was going to happen whether I had a change of heart or not. So...

CHARLES: And you're pleased with the outcome?

MILLER: I'm very pleased with the outcome.

SMITH: It's weird for Debra. I mean, global forces made her a millionaire, but global forces also took something away from her - her land, her land that's been in her family for three generations. Her uncle Darrell Willdan (ph) explains it for us.

DARRELL WILLDAN: She's sad in a sense and relieved in a sense. I mean, I know her feeling because I sold the farm that I was born on, see? So she inherited this farm from her grandfather, you might say. And she hated to see it go.

CHARLES: Darrell Willdan is 88 years old. He's one of the oldest people in the room. And he's seen farm prices go up, farm prices go down. No matter what the economists say, he thinks it's a bubble. And he's waiting for the bust.

WILLDAN: It's getting a little out of hand. This happened back in the '80s. A lot of young farmers bought land like this in the late-'80s and spent $6,000 an acre for it. And they went broke doing it because land went - that $6,000-an-acre land dropped to $2,500 an acre in eight years' time. And it could happen again. We don't know what the hell's in the future.

SMITH: Willdan does have a point here. I mean, even if something isn't a bubble, it can still go down, I mean, especially if those global forces we talked about change - if interest rates go up, if corn prices drop through the bottom. No one's saying that farmland will necessarily stay high forever.

CHARLES: But there are also a lot of reasons to think that farmland is not going to behave quite like housing in Las Vegas or Florida, the kind of housing that crashed and forced people into foreclosure.

SMITH: Yeah, exactly. I mean, for one thing, there isn't much turnover in farmland. I mean, no one that we heard of flips a farm a few months later after, you know, repainting the barn or anything. The transaction costs of buying and selling farmland are actually pretty high.

CHARLES: But also, the bankers in Iowa that are lending money to people who are buying farmland - they actually remember the last farm crisis that didn't happen too long ago. It happened in the 1980s. And they are not letting farmers buy land with little or no money down. Thirty percent down payments are standard. And a lot of farmers are actually putting down 60 percent of the purchase price.

SMITH: And perhaps most importantly, you know, when we talked to people in the auction business, when we talked to people in the auction room, they told us these are mostly farmers buying this land, not necessarily speculators from out of town in New York or LA. Bruce Babcock says the people who buy the land actually want to work the land.

BABCOCK: They're putting their own money into the farm probably with the expectation that they're going to farm this or their kids are going to farm it for the next 50 years. So a lot of people that are investing in land and those today are really hard-nosed businessmen - and they will probably all be men - out there, making a judgment about the future and about their family's future. And they want to be farmers. And they want to own farmland.

CHARLES: And Babcock - he doesn't even think that the end of ethanol subsidies could hurt land prices too much. The 45-cent-a-gallon ethanol subsidy - it's scheduled to expire at the end of this year. And with all the deficit cutting, it's actually hard to imagine that it will survive.

SMITH: But the thing is that everyone in the auction knows this. This is an obvious fact. The loss of subsidies are already priced into the land. And so far - so far, I'll say - nobody seems to be thinking twice about buying farmland.

CHARLES: So really, it does not seem like these days it takes a lot of irrational exuberance to decide to buy farmland. It takes a little optimism. It takes a willingness to do some hard work. And it takes an awful lot of money.


DAILEY: (Singing) We want riches, darling. We want fame. You can't take the money with you down, down, down the drain.

SMITH: We would love to bring our PLANET MONEY microphones out into the country more often. So if you have seen a peculiar boom or bust cycle in your own town, let us know. Our email is

CHARLES: Or you can reach us on Facebook or Twitter. I'm Dan Charles.

SMITH: And I'm Robert Smith. Thank you for listening.


DAILEY: (Singing) Yeah, we want riches, darling. We want fame. Can't take the money with you down, down, down the drain. When this war's over, we can get away.

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