When farm real-estate broker Mac Boyd discovered that he had a bidding war on his hands for a piece of farmland in Champaign County, Illinois, he couldn’t believe his good fortune. Three potential buyers were vying for 274 acres he had put on the market at what he thought was a relatively expensive minimum of $10,000 an acre. After all the bidding was finished, it sold for a whopping $15,250 an acre. The deal was like none he had ever seen before. Only a year ago, you could have bought that same property for $9,000 an acre.

For the past three years, Boyd’s phone has been ringing off the hook, with an average of six buyers expressing interest in each piece of farmland listed by his firm, Boyd Real Estate in Arcola, Illinois. He clocks 6,000 miles a month in his Buick Rendezvous, cruising the back roads of Illinois – the heart of Grain Country – showing property to prospective buyers. “I’ve never in my 35 years of business seen farmland so favored as an investment as it is now,” he said. “People are taking money out of stocks and putting it into land. Everyone’s chasing the same rainbow.”

Boyd’s rainbow, which stretches across America’s farming heartland, has been created in part by record commodity prices and in part by readily available, cheap credit. And while available credit has become less available with the financial crisis, Boyd is still convinced that the global demand for food will serve up the best deals of his life. This summer, the price of a bushel of corn rose as high as $7.50, from around $2 in 2005. Net farm income, a gauge of profitability, is forecast to hit a record $95.7 billion this year, up 10 percent from 2007. To take advantage of the record prices, farmers rushed to buy more acreage to plant. The result? In corn and soybean growing states such as Illinois, Iowa, Nebraska, South and North Dakota, and Minnesota, farm values have doubled since 2000. In the beginning of 2008, farm real estate values averaged a record high $2,350 an acre, up 8.8 percent from 2007, according to the U.S. Department of Agriculture. Even as land prices soared, farmers found a willing lender in the Farm Credit System — a nationwide financial cooperative that lends money and provides financial services to farmers, ranchers, commercial fishermen, agribusinesses, and rural home owners. The Farm Credit system held more than $45.3 billion worth of the nation’s agricultural debt load of $211.5 billion at the beginning of 2008, more than any other agricultural lender, including commercial banks.

But like every overheated market, this one carried the seeds of its own destruction. While land prices have surged, cash rents — the real returns that land generates and a measure akin to the earnings yield on a stock — have failed to keep pace. Over the past ten years, rents as a percent of cropland value have declined nationwide, from about 4.96 percent in 1998 to 3.15 percent last year. Just as the residential real estate boom was built on the idea that home prices would continue to rise indefinitely, the farmland bonanza relies on rising commodity prices.

Now, with the world’s financial house in disarray, some experts are warning that the agricultural real-estate market could be unsustainable. Iowa’s superintendent of banking, Thomas Gronstal, told the U.S. Senate’s Banking, Housing, and Urban Affairs Committee in March that “we could be witnessing the development of a bubble,” a sentiment echoed by 50 percent of bankers in 11 Midwestern states, according to a survey by Creighton University.

Why the pessimism? Softening corn and soybean prices. Corn at $4.84 a bushel is hovering at an eight-month low, and soybean at $10.53 a bushel is at a10-month low. Add the possibility that the massive state and federal government subsidies for the ethanol industry might dwindle as a new president and Congress struggle to contain the country’s economic problems, and the downward pressure on corn prices would intensify. “If you are buying land now based on prices of $6 or $7 a bushel for corn and you only get $5, you might have some problems keeping up with the debt you take on,” says Lee Egerstrom, a research fellow working in the area of rural economic development for Minnesota 2020, a think-tank.

And there’s too much debt that relies on the prices of these commodities continuing to rise. The USDA forecasts that farm business debt will stand at about $228 billion by the end of 2008, up $8 billion from 2007, a record increase for a fourth consecutive year. Farm mortgage debt alone is expected to rise 2.8 percent, to $120.8 billion. Farmers are getting squeezed from sharply higher costs for everything from energy and fertilizer. Total production expenses are projected to increase by a record $40 billion in 2008 to $295 billion a year, according to USDA. If the price of debt payments also goes up as land and commodity prices soften, the squeeze may become fatal.

A burst bubble could inflict broad damage on farmers, farming communities, and the community banks with large agricultural-lending arms such as Nebraska’s City National Bank and Iowa’s Glenwood State Bank, according to Goss. About a third of U.S. farmers receive their loans from the Farm Credit System, while a further 40 per cent of U.S. farmers borrowed from small community banks in rural areas. But bigger banks such as Wells Fargo and Rabobank have also been ramping up their farm lending portfolios in recent years. “Any collapse of any market that makes an awful lot of capital disappear will spill over to everybody, especially for the portfolios of financial institutions. They really don’t need a collapse of the farmland market to hit them as well,” says Egerstrom.

A crash isn’t without precedent. From 1982 to 1987, thousands of farmers were forced into foreclosure when interest rates spiked and crop prices declined. But there are key differences between today’s surge in farmland prices and the problems in the past. First, the Farm Credit System is stronger – it was recently recapitalized — and has been successful in avoiding the liquidity crunch experienced by bigger banks. Second, debt-to-asset ratio for the average U.S. farmer now stands at about 9 percent, sharply lower than it was during the last collapse of prices, when it stood at 22.6 percent. “We had more debt relative to the asset levels than we do now,” says Gary Schnitkey, a professor of agricultural economics at the University of Illinois.

Still, some experts have warned of the danger lurking in these numbers. “If commodity prices were to decline to near historic levels, debt payment capacity would be seriously affected and the [Farm Credit] System’s credit risks would increase,” Agriculture Undersecretary Mark Keenum told the Senate Agriculture Committee on September 24th. But despite the credit crunch, the Farm Credit System has been successful in avoiding the liquidity problems experienced by the bigger banks.

And even farm brokers who have been happily riding the wave of prosperity are becoming more circumspect about the long-term. Boyd is worried that a slowing global economy may cool grain prices. “The return on an acre of land depends on the income generated on it,” he says. “The lower earnings capacity will get some people thinking about whether they want to invest in land.” But he’s still optimistic, and his phone is still ringing off the hook.

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