Why Farmland Doesn't Face Armageddon
(DTN) Some Federal Reserve and bank regulators—as well as a few country bankers—now think farmland conditions are ripe for a “bubble.” They point to the 10 percent year-over-year appreciation in the Chicago Federal Reserve district in 2010 as proof of irrational exuberance. Parts of Iowa’s ethanol alley hit 17 percent gains at the end of the third quarter. Overall farmland nationwide has outpaced inflation by about 56 percent since 2000.
Growers still need to conduct their own stress test when projecting paybacks with fickle farm income, but most of ag sources I interview think bubble worries are premature. What’s more, they see few parallels to the 1970s that triggered the disastrous price corrections of the 1980s.
“A flattening is possible,” but there’s no imminent threat of a bust, says Danny Klinefelter, a Texas A&M University economist and ag finance expert. “We’re a couple of years away from any tailspin like the 1980s, at the very least.” Here are a few more rational reasons why concerns about a farmland price bust of 50 percent or more may be premature:
1. Most of today’s land deals are farmers or outside investors with cash. So the most recent sales could weather a storm. “People aren’t leveraged to the hilt like they were in the 1980s,” Klinefelter says.
2. Ag banks have been stingy lenders compared to the home mortgage industry. There’s no such thing as no-money down, interest-only, liar loans in agriculture. If you’re anywhere below a blue-chip customer, you need 25 percent to 30 percent down just to qualify for a mortgage, Klinefelter says.
3. Farmers have bullet-proofed their long term interest rates. That’s the opposite of the 1980s when virtually all farmland mortgages were variable rate and growers couldn’t pay the bills when rates jumped from 7 percent to 16 percent. Today 43 percent of Louisville-based Farm Credit Services of MidAmerica’s total loan portfolio (including operating loans) has a fixed rate for 10 years or longer and the average rate for those loans stands at 5.70 percent, according to CFO Paul Bruce. In early November, you could still lock in a 20-year loan for 5.65 percent—the lowest rates at FCS in 50 years, he adds. In the last two years, more than 48,000 customers at FCS of MidAmerica took advantage of such refinancing.
This last point is crucial, because it’s a good defense should commodity prices suddenly bottom as they did during the Asian currency crisis of the late 1990s, or after political interference like the Carter Administration’s Soviet Union’s grain embargo. Some catastrophic event could hit prices again--say an end to our ethanol policy or some global epidemic. But this time around, farmers will have hedged their bets.
http://www.dtnprogressivefarmer.com
Growers still need to conduct their own stress test when projecting paybacks with fickle farm income, but most of ag sources I interview think bubble worries are premature. What’s more, they see few parallels to the 1970s that triggered the disastrous price corrections of the 1980s.
“A flattening is possible,” but there’s no imminent threat of a bust, says Danny Klinefelter, a Texas A&M University economist and ag finance expert. “We’re a couple of years away from any tailspin like the 1980s, at the very least.” Here are a few more rational reasons why concerns about a farmland price bust of 50 percent or more may be premature:
1. Most of today’s land deals are farmers or outside investors with cash. So the most recent sales could weather a storm. “People aren’t leveraged to the hilt like they were in the 1980s,” Klinefelter says.
2. Ag banks have been stingy lenders compared to the home mortgage industry. There’s no such thing as no-money down, interest-only, liar loans in agriculture. If you’re anywhere below a blue-chip customer, you need 25 percent to 30 percent down just to qualify for a mortgage, Klinefelter says.
3. Farmers have bullet-proofed their long term interest rates. That’s the opposite of the 1980s when virtually all farmland mortgages were variable rate and growers couldn’t pay the bills when rates jumped from 7 percent to 16 percent. Today 43 percent of Louisville-based Farm Credit Services of MidAmerica’s total loan portfolio (including operating loans) has a fixed rate for 10 years or longer and the average rate for those loans stands at 5.70 percent, according to CFO Paul Bruce. In early November, you could still lock in a 20-year loan for 5.65 percent—the lowest rates at FCS in 50 years, he adds. In the last two years, more than 48,000 customers at FCS of MidAmerica took advantage of such refinancing.
This last point is crucial, because it’s a good defense should commodity prices suddenly bottom as they did during the Asian currency crisis of the late 1990s, or after political interference like the Carter Administration’s Soviet Union’s grain embargo. Some catastrophic event could hit prices again--say an end to our ethanol policy or some global epidemic. But this time around, farmers will have hedged their bets.
http://www.dtnprogressivefarmer.com
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