Is there a farmland bubble?

The Los Angeles Times came out with a story this morning about a recent surge in farmland prices. According to the Times, more and more investors are swooping in and gobbling up California farmland– including in the Central Valley– Contributing to a spike in land prices. Coupled with increasing Chinese demand for American produce as well as meager returns on traditional investments such as stocks, bonds and housing, farming has become quite attractive to investors looking to park their money in more lucrative sectors. However, many are concerned that the current boom in farmland is not sustainable, and will eventually lead to a bust. Sound familiar?

Living at ground zero for the foreclosure crisis, Stocktonians should instantly recognize this pattern. While the housing crisis and the current run on farmland represent two different sectors, the dynamics are the same: skyrocketing land prices creating unsustainable and artificial prosperity.

The way I see it, there are two takeaways relevant to our region. In the short run, burgeoning farmland values may mean that farmers are less likely to sell their land to developers. With housing prices still largely depressed, purchasing expensive farmland for the development of subdivisions becomes less attractive. Even if farmland has already been purchased, rising commodities prices could keep this farmland in production since farming is so profitable at the moment. The longer development at Stockton’s edges stagnates, the more time the city has to come up with a plan to mitigate against another housing boom and encourage investment and development in existing neighborhoods.

Courtesy Michele Valentinuz

Courtesy Michele Valentinuz

However, once this bubble bursts, the region could be devastated, just as it was when the housing sector collapsed. A sharp fall in prices could have far reaching effects across the state, especially in our region where agriculture is the primary industry. Further, falling farmland prices may encourage a shift to a more lucrative use, such as the development of houses, which this site advocates against.

Hopefully, a recovery of drought-stricken farms as well as impending changes in federal farm policy will temper the unsustainable rise in farmland price, blunting the effects of a bubble.

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Categories: Community Commentary, Smart Growth

Author:David A. Garcia

David A. Garcia founded SCL in March of 2012. He holds degrees from UCLA as well as Johns Hopkins University and currently works as the Director of Community Development at The Cort Group in Downtown Stockton, and previously worked as a researcher/analyst for a congressional agency in Washington DC. The views expressed here are solely of the author.

3 Comments on “Is there a farmland bubble?”

  1. December 30, 2012 at 1:13 am #

    With a paper lot inventory of 20,000-30,000 already approved lots, Stockton is insulated from farmland prices for the next 20-30 years as they relate to housing development. The existing inventory is so large that it will take a long time to plow through it. The land where such already approved developments are situated might look like farmland today, to the naked eye, but it has been already rezoned to R-1 and higher uses. Therefore any bubble in farmland prices would have almost zero effect on the Stockton development scene for quite a long time.

    The potential bubble you are describing is more of a globalization story coupled with US subsidies. Consider this example to demonstrate the point:

    With an average $20,000/acre farmland price in Central Valley, a big farming operation could sell its holdings in California and move to Brazil where the price per acre is $200. In addition to multiplying the size of your farm, the new Brazilian operation would entail the latest in irrigation and farming technology( and farming equipment). Therefore not only you could multiply your land area by a very sizeable factor but you would also have a state of the art, brand new and super efficient farming operation in Brazilia. Even if you add the transportation costs via sea lanes it makes more sense to farm in Brazil than in the US. Of course there are environmental factors, national security issues and other issues as well. But if the driving force of the markets is to deliver ag products at maximum pricing efficiency, then globalization is moving such production to the periphery rather than the old centers. (US, Europe). Whether such forces would eventually deflate US farm prices is debatable. Africa could provide plenty of ag products to Europe as an example, if it was allowed to pierce the veil of protective European subsidies.

    However, in the Stockton case I see no nexus between increasing or decreasing farmland prices and future development. It would appear that Stockton has been provisioned with development project inventory enough to last through 2040.

  2. January 3, 2013 at 11:42 pm #

    David:

    Here is why the “doubling” of ag land pricing has zero effect on new development around Stockton.

    Let’s examine a typical case by the numbers:

    Normally a land developer would price his/her paper lot (in San Joaquin county) around $20,000. Before the lot gets built on the following other land costs (from the builder’s perspective) should be added:

    $45,000 per lot to convert it to a finished lot (with infrastructure and power/sewer and water hook ups at the curb).

    $75,000 per lot of city imposed fees per the latest general plan.

    $10,000 per lot in carrying costs (interest on 2-3 years from approval to building/to actual sale of the housing unit).

    Therefore the imputed land cost from a builder’s point of view is: $20,000 (paper lot price) + $45,000 (finished lost cost) + $75,000 (city fees) + $10,000 (miscellaneous, other – primarily carrying cost) = $150,000 per lot.

    The rule in the building industry is that such imputed land cost could not be more than 30% of the finished house’s sale price in order to make sense to engage in new construction. In other words, the builder would need to sell a new house no less than $150,000 divided by 30% = $500,000 per new unit.

    So, this – the final house price – becomes the determining factor for new development. Unless you see average new housing price more than $500,000 in San Joaquin then new development is market restricted(by market forces). And with current prices for housing built in the last decade around $200-250K there is a long way from reaching the pricing that justifies new development.

    Now, let’s go back to your original thesis of ag land prices doubling from $11,000 per acre to $22,000 per acre or more. Since the typical suburban density in Stockton is 4.3 units to the acre this means that when a typical land developer here charges $20,000 per paper lot in effect he/she is charging 4.3 X $20,000 = $86,000 per acre. As you can see there is a great difference between cost of ag land the land price charged by a land developer holding entitled property. Ag prices could double or triple with a local developer fully able to absorb such increases with no sweat other than evaporating potential profits.

    And since Stockton has already 20-000-30,000 paper lots of inventory already, with locked-in old land pricing, you could not count on increased farm land pricing as a method of decelerating and controlling future development. The minute the markets allows new housing units circa $500K per house, new development will burst out of the flood gates(which also happens to be Stockton’s recurring problem).

    Keep this in mind as you theoretically try to curb fringe development in favor of urban/downtown development. My own view is that given the hanging inventory of approved paper lots you couldn’t (unless you find a way to cancel previously entitled projects via inactivity and in accordance to the existing development agreements/law).

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  1. The good news, the bad news of a farmland bubble - December 31, 2012

    [...] Stockton City Limits has some ideas on how this might affect [...]

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