U.S. bankers talk of farmland bubble, but jury out

Thu Jul 21, 2011 4:02pm EDT

* U.S. farmland prices soar on world food outlook

* Farmers less leveraged than in 1980s land bubble

By Christine Stebbins

KANSAS CITY, Mo., July 21 (Reuters) - Soaring U.S. farmland values in the past year are causing worries among agricultural bankers that a farmland "bubble" may be brewing similar to one that triggered the farm crisis of the 1980s.

But the fears are tempered by a healthy U.S. agricultural economy. Farmers have used record incomes as commodity prices spiked to reduce debt, upgrade equipment -- and buy land.

"As lenders, we are all concerned about a bubble. Is there a bubble? Yes. But it depends on how you manage that bubble," said Jeffrey Gerhart, head of the Bank of Newman Grove, Nebraska, who spoke at an ag lending conference sponsored by the Kansas City Federal Reserve this week.

In its latest farmland survey issued in May, the Kansas City Fed reported that farmland values in its district stretching across southern Plains wheat and cattle areas had soared 20 percent higher than a year ago in the first quarter.

"That is an incredible increase. I don't think increases like that are sustainable," Joseph Glauber, chief economist at the U.S. Agriculture Department, said in an interview.

"The real question is whether or not they (land values) are adversely affected. Right now, I don't think anybody has foreseen big declines in commodity prices," Glauber added.

Recent farm sales in big corn and soybean states like Iowa and Illinois have fetched as much as $13,000 an acre -- levels unheard of, bankers at the conference said, and easily double the amount the land was valued at just a few years ago.

Bankers say both farmers and investors are buying farmland. In fact, most farmland is bought by farmers -- a buy and hold strategy -- to expand their operations. Investors, on the other hand, are again attracted to U.S. farming's long-term value.

The U.S. is the world's single largest grain and overall food exporter, both for commercial sales and aid shipments. So with world food needs tied to population projections of 2 billion more people by 2050, U.S. farmland looks a solid bet.

Ejnar Knudsen, a fund manager with Passport Capital in California, told the conference that U.S. agriculture may be on the cusp of an investment boom similar to the mid-1970s.

"We've transferred a lot of our wealth to the Middle East. But they have aquifers that are not replenishing, they are phasing out their wheat production, they have food security issues," he said, adding that China was also hyper-sensitive to the destabilizing effects of high food prices and scarcity.

"These countries have our money and they are worried about their ability to continue to govern and they need to deal with food issues," Knudsen said. "So I expect a significant amount of money to come here to buy our resources."

CYCLES CUT BOTH WAYS?

Such talk of boom times is what usually worries farm bankers, who live with the volatile price cycles of commodities -- and farm incomes -- year in and year out.

"My concern is that there is not a realization that even if we have to increase our food production, which they will, that still doesn't point you to a linear progression in farmers' income," Daryl Oldvader, chief executive officer at FCS Financial, a Farm Credit System member, said in an interview.

"Two years ago we had one of the most serious swine economic situations. That gets lost in the shuffle of the land and the euphoria. The animal protein side suffered greatly -- dairy, pork," he said of farmers squeezed by rising grain prices for feed, which erased their profits or savings.

Oldvader and other bankers recalled the 1980s farm crisis, when over-leveraged farmers who'd bought land lost their farms, driving land values even lower in a vicious spiral of sales as credit tightened, payments were missed, and assets lost.

"We've all lived through a similar event," said Doug Hofbauer, chief executive of Frontier Farm Credit in Manhattan, Kansas. "I don't know if the circumstances are nearly the same. So to say to that we are going to repeat a previous level of experience that we went through is probably unfair."

Hofbauer and other bankers said they would not be surprised to see a correction in farmland values. But the huge debt repayments farmers have made in recent years as grain prices soared has eased the concerns of some economists and bankers about dangerous leverage and a potentially ruinous bubble.

"Whether there is or isn't, I think the lenders are better prepared for this," said Paul Ellinger, head of the University of Illinois ag economics department. "The really large land purchases in Illinois, a lot of it is going for cash." (Reporting by Christine Stebbins; Editing by Marguerita Choy)

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