WASHINGTON (Reuters) - 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 debt.”
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.
“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 federal deficits.
Editing by Walter Bagley