* FDIC's Bair says high prices may mean future problem
* No credit problem now, but agriculture is cyclical
* In recession of 1980s, land value dropped 27 percent
* High crop prices, low interest rates drive land surge
* Lenders say stricter loan standards are being used
(Adds Iowa economist says land prices likely to rise)
By Charles Abbott
WASHINGTON, March 10 The steep rise in U.S.
farmland prices creates the potential for agricultural credit
problems if there is a sharp downturn in the sector, a leading
U.S. financial regulator said on Thursday.
Farmland values doubled in the past decade, reaching a
national average of $2,140 an acre in 2010. Record-high crop
prices and low interest rates make farmland an attractive
investment, analysts say.
Federal Reserve officials said recently they were watching
to see if the land market is becoming overheated, or if a price
bubble is forming.
Chairman Sheila Bair of the Federal Deposit Insurance Corp
said at an FDIC forum "while we don't see a credit problem in
agriculture at this time, the steep rise in farmland prices we
have seen in recent years creates the potential for an
agricultural credit problem sometime down the road."
"We'd like to avoid that," she added.
Lenders, regulators and farmers "need to stay attuned" to
long-term risks, Bair said at the symposium, which focused on
farmland prices. If crop prices fall, farm income falls or
interest rates rise, she said, "farm operators can find it very
difficult to make ends meet and service their outstanding
Brian Briggeman, an economist at the Kansas City Federal
Reserve Bank, said the interest rate risk facing farmland
values was quite.
Land values could drop by one-third, if interest rates
return to a more traditional 7 percent, based on past
correlations, Briggeman said. Land is 85 percent of farm
assets, so a one-third drop in land values would reduce a
farmer's equity by 20 percent to 25 percent, he said.
For a graphic on U.S. farmland prices since 1970:
"I don't think they (land values) are over-valued, given
current conditions," said Brent Gloy, an agricultural economist
a Purdue University. He cited strong demand for U.S. crops and
low interest rates.
Joseph Glauber, the Agriculture Department's chief
economist, said comparisons to the late 1970s, when land prices
soared, "seem unfounded" as farmers carry lower debt-to-asset
ratios now and the farm income outlook appears strong.
The agricultural recession of the 1980s included an abrupt
drop in land prices and vast rural financial distress that
forced a federal bailout of lenders and the write-off of
hundreds of millions of dollars in farm loans.
Two agricultural lenders at the symposium said they employ
conservative standards to assure farmers can repay loans if
conditions worsen. Bankers ask farmers to make larger down
payments and are stricter about repayment terms. Unlike the
1970s boom, little land is sold on contract.
"One thing we've gotten good at is saying no," said Matthew
Williams, president of the Gothenburg State Bank in Gothenburg,
Nebraska. "That is sometimes the best thing a banker does."
Kenneth Keegan, chief risk officer at Farm Credit Services
of America, said his institution keeps in mind the "long-term
sustainable value" of a loan and limits its exposure below it.
Agriculture is a cyclical business. It blossomed in the
1970s as a result of huge grain sales to the Soviet Union and
land values tripled in seven years. They collapsed by 27
percent from 1982 to 1987, when crop prices plunged and
interest rates soared. It took 13 years for values to recover.
A month ago, economists at the Kansas City Fed said in some
cases rental rates are not keeping up with land values, raising
questions if land prices are sustainable.
Mike Duffy, Iowa State University agricultural economist,
said in an interview on Wednesday that 2009's dip in land
values, the first in 21 years, "shows me there is still
discipline in the market." He said prices will continue to rise
at least in the short term.
"There are some worrisome signs when I look at what
happened in the 1970s and what is happening today," former FDIC
Chairman William Isaac said in opening the FDIC symposium,
pointing to the overall U.S. economy and problems like large
(Editing by Walter Bagley)