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.