Farm and ranchland prices in the United States have risen about 58% since 2000, adjusted for inflation, according to FDIC figures. In the same time period, commercial and residential real estate prices…well, you haven’t been living underneath a rock on Mars since then, so you know the trend. Does this mean that farmland buyers are inflating a bubble?

Thomas Hoenig, chairman of the Kansas City Federal Reserve district, would say that the signs are pointing in that direction. Addressing a November 2010 meeting of agricultural bankers, Hoenig pointed out that many of our policy decisions (like quantitative easing, aka “printing money”, which Hoenig opposes) are echoing the moves made back in the 1970s, which is when the seeds of our current real estate crisis were sown. Noting that commodity prices have risen, but that the value of farmland has risen beyond the nominal productive capacity of the land, he warns that easy decisions being made now lay the groundwork for collapse later – and worries that farmers will be tempted by high commodity prices to leverage their existing land base for additional acquisitions.

Other observers are more sanguine. Jeffrey Conrad, president of Hancock AIG, one of the nation’s largest agricultural investment groups, which manages more than 210,000 acres of prime farmland with a market valuation of $1.3 billion, says that the warning signs of an asset bubble simply aren’t there. Average farm leverage (the ratio of debt to equity) is at historical lows and trending further down; farmers are paying off debt, not adding debt for new acquisition, one of the key signs of an asset bubble. Debt is down 39% in real terms from the 1981 peak, debt per acre is down almost a third, and net farm income per acre has increased by 52% over the last year.

Hancock admits that some of these figures are strengthened, perhaps temporarily, because of high commodity prices for corn, soybeans, and wheat. At the same time, however, investor returns on farmland properties have remained in the black for several years despite commodity and input price swings, indicating that at least on the surface investors are paying rational prices for farmland. Over the long term, Hancock and other bubble doubters say that strong US export growth, particularly to China and other emerging markets, should keep agricultural growth strong.

So who’s right? We’ll explore that more next week, and I will also try to reframe the issue a little bit and explain why “bubbles” are a powerful explanatory model for the macroeconomy, but might not be quite so useful for the individual investor or farmer.

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.

A while back, I talked about the story of Cain and Abel and the metaphor of early farmers who came into conflict with hunter-gathers and herding societies – Cain of course representing the former and Abel being the latter. While Cain has traditionally seen by the three Abrahamic faiths as being the "bad guy," I suggested that in the broader context, the story wasn't really about "good" and "evil" – just the often tragic consequences of what happens when a newer way of life overtakes another.

Now that we’ve all enjoyed our Thanksgiving meals, it's worthwhile to consider how the Cain and Abel story played out in North American history.

Agriculture was not unknown to American Indians (by the way, this is what most of them prefer to be called as opposed to "Native American" – an acknowledgement of the fact that their ancestors were also immigrants to this continent, starting between 20,000 and 40,000 years ago). Most were hunter-gatherers. Those living on the Great Plains, Great Basin or the Inland Pacific Northwest didn't really have that much of a choice; without massive clearing of the land, irrigation and tools to dig, it's pretty hard to cultivate food plants in these areas. Others, such as the Salish and Chinookan-speaking peoples of the Pacific Northwest Coast, lived among such abundance, they didn't have to work very hard to get food – giving them the leisure time to develop some of the continent's most sophisticated native art (that's where you find elaborate totem poles and wood carvings). The Dineh (Navajo) of the Four Corners region eventually turned to herding, rather like Abel.

There were however a number of Indian tribes that did practice agriculture. The Mandan of present-day North Dakota were one of these; another were the mysterious Anasazi, who had a rather sophisticated urbanized society and a political empire that once covered a good chunk of southern Utah and Colorado as well as Arizona and New Mexico.

When the "Pilgrims" established their colony in 1620, they encountered Indians who cultivated maize (or what we call "corn" – which used to be a generic word for all cereal grains). These were the Wampanoeg, one of the Algonquin-speaking tribes who lived in most of New England. Interestingly, the Wampanoeg celebrated fall harvest festivals every year, much like Europeans. The story of how Tsiquantum (Squanto) taught these early colonists about growing maize is well-known. The European colonists weren’t new to agriculture, of course, but they were new to the New World and they had not yet learned the weather patterns, soil characteristics, and local conditions that are critical for successful farming (particularly in the days before mechanization and artificial fertilizers).

Many of the sentimental views of American Indian tribes held by today’s non-Indians lack any basis in fact. The Indians didn’t live in perfect harmony with nature, they made war on one another just as most people across the world have always done, and so forth; they were and are regular people with all the foibles and follies of our species. There is one idealistic view that does have some basis in fact, however, which is that the American Indians had a sustainable model of agricultural development and mixed-use food production. It has been out for a few years, but “Enduring Seeds,” an excellent book by a top botanist discusses how the Indians preserved an enormously rich gene pool of plants and animals as part of their food production system, and how important it is for us to maintain and extend that gene pool rather than seeking ever higher yields from monoculture.

In 1620, European settlers began to learn the intricacies of New World food production from people who had been developing their skills for thousands of years. Almost four hundred years later, we may finally be learning another important lesson about preserving the genetic diversity of our food supply.