Agricultural bankers should be careful about lending to farmers who may be tempted to overextend themselves to invest in farmland as values skyrocket, the president of the Kansas City Federal Reserve Bank warned on Feb. 17.
Bank chief Tom Hoenig said his bank was watching the land market for signs of a speculative bubble. A rise in interest rates from current low levels could sap farmers’ ability to pay for land and push values down “by as much as a third,” he said.
Farmland, often a farmer’s largest asset, is zooming in value due to near-record commodity prices and a boom in farm income. The Agriculture Department forecasts record farm income this year and large harvests.
“We caution the lenders … to be very careful,” said Hoenig. Low interest rates and high crop prices can distort balance sheets, he said. “You have to be very mindful prices are going up very quickly.”
Farmland values rose by 12 per cent in the Midwest during 2010, the Chicago Federal Reserve Bank reported Feb. 17. The rise in value for “good” agricultural land “was in a tie for the second-largest increase of the past 30 years” it said.
Across the nation, farmland values posted double-digit increases in the past year with additional gains expected this year, said two Kansas City Fed economists. In a Jan. 14 memo, they said high crop prices and low interest rates “have fuelled a surge in farmland values, raising concerns about a bubble in the agricultural real estate market.”
“History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions,” Hoenig told senators.
Farmland in the Plains rose in value by nearly 20 per cent from year-earlier levels. Earlier this week, the Kansas City Fed said in some cases rental rates were not keeping pace with land values, raising doubts if land prices are sustainable.
Agriculture Secretary Tom Vilsack, who testified before Hoenig, said U.S. farm income would set a record high this year, the result of high crop prices and strong export demand. Farmers are paying off debt, he said, and the debt-to-asset ratio, a gauge of financial strength, should drop from the 11.3 per cent of 2010.