Fed’s Hoenig Says Farmland Boom May Be ‘Unsustainable Bubble’
Kansas Federal Reserve President Thomas Hoenig
Brendan Hoffman/Bloomberg
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. Photographer: Brendan Hoffman/Bloomberg
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Federal Reserve Bank of Kansas City President Thomas Hoenig said soaring farmland prices may be the result of an unsustainable bubble that could damage the U.S. economy when it bursts.
“My nagging concern remains that current distortions in financial markets are increasing the risk that imbalances in asset markets will catch agriculture -- and the U.S. economy more generally -- by surprise once again,” Hoenig told the Senate Agriculture Committee today, according to his prepared testimony.
Hoenig, the lone dissenter from every Fed meeting in 2010, has warned that the Fed’s near-zero interest rates and record monetary stimulus could lead to “future imbalances and increase risks to longer-run macroeconomic and financial stability.”
Hoenig spoke after a report today from the Chicago Federal Reserve showed Midwest farmland values rising 12 percent in the fourth quarter from a year earlier. In Hoenig’s district, the Kansas City Fed has recorded cropland prices nearly 20 percent above year-earlier levels in Kansas and Nebraska, Hoenig said.
“This run-up in farmland values has occurred, however, amid financial markets characterized by high levels of liquidity and unusually low interest rates,” he said. “It is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions.”
Rising Commodities
Farm prices have also been bolstered by rising commodities. The price of corn has doubled in the past year, to $6.64 a bushel from $3.33, according to the Department of Agriculture. The price of wheat has risen 77 percent in the same period.
Fed chairman Ben S. Bernanke attributed the rise in crop prices primarily to growing demand in emerging markets in remarks at the National Press Club in Washington on Feb. 3.
“The most important development globally is the fact that the world economy is growing more quickly, particularly in the emerging markets,” Bernanke said, when asked why food prices were rising.
Hoenig said that an increase in borrowing costs could cause a drop in land prices.
“Rising interest rates often coincide with falling farm revenues and higher capitalization rates, a depressing combination for farmland values,” he said.
“Even if crop prices remain high but capitalization rates return to their historic average, farmland values could fall by as much as a third.”
Reasons for Optimism
Hoenig noted reasons for optimism because agriculture “entered this period with a relatively strong balance sheet” and agricultural banks “are well capitalized.”
The Labor Department reported today that rising food and fuel prices pushed up the U.S. cost of living more than forecast in January. The consumer-price index advanced 0.4 percent for a second month, led by the biggest increase in food costs in more than two years.
“The issue with inflation is that it always is very small increases,” Hoenig said today in an interview on Fox Business Network. “It starts slowly, perhaps as we’re seeing now, and builds over time.”
Fed presidents rotate voting on monetary policy and Hoenig, 64, will not vote this year. He joined the Kansas City Fed in 1973 as an economist in banking supervision after earning his doctorate at Iowa State University. Hoenig became president of the Kansas City Fed in 1991.
To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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