Speculative bubbles have long been a staple of market economies. As one Wall Street investor pithily said, “if a price is free to move, it is free to move stupidly.” Investors sometimes decide that a boom in one sector of the economy is a permanent feature of the landscape, that growth will never end, that double and triple-digit returns on investment are normal and to be expected. Prices will keep going up forever, and it makes good sense to borrow cash in order to invest in a market that endlessly repays investors.

Naturally, none of that is realistic. Industries do grow and new products do come into being – the personal computer or mobile device you are reading this blog post on was part of a new technology that simply didn’t exist before, which created real growth and real profit – but it is very easy for human beings to convince themselves that a short-term trend, like a growth in real-estate prices or the value of tech stock equity, represents a permanent change in the market rather than being a contingent, and temporary, phenomenon. When investors “lose their minds” in this way, the result is a bubble – an ever-increasing price for a good or service, unmoored from considerations of actual return on investment or sustainability. Notorious bubbles in recent US history have included the commercial and residential real estate markets in some (not all) cities and states and the tech equity bubble of the very early 21^st century. The most famous historical bubble was the Dutch tulip bulb mania in 1636, during which speculators drove the prices of some tulip bulbs to astronomical heights before the market complete collapsed a few months later.

In the last year or so, a concern has grown up that farmland prices may be showing signs of being overvalued, a possible first sign of a developing bubble. This is not an idle fear, and the issue deserves careful attention and study. Tulip bulbs had no deeper economic significance, tech stock equity plays mainly affected rich capitalists who became somewhat less rich – but farmland is where we grow our food. An economic dislocation in the computer industry means that hard drive prices don’t fall as fast as they used to, or that memory chips are a little hard to come by; an economic dislocation in agriculture could mean that people starve to death. Tulip bulb mania is amusing; farmland mania is potentially terrifying. Since 2000, average farmland prices in the US are up by 58%. Is this an early warning sign that farmers and investors are losing sight of the underlying value of the land?

In the next several weeks I will be taking a careful look at farmland prices and discussing the potential of a farmland bubble. We’ll look at whether farmland is overvalued, whether farmers are behaving irrationally in adding land to their capital base, and whether investors are making responsible plays or are simply fueling uninformed speculation. The answers are important to farmers and to everyone who relies on farmers – which is all of us.