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Omniscient or Overprotective?

By: Kari English

It is no secret that ag lenders have done very well despite the recession. Net cash farm income is forecast at $99 billion this year, up $7 billion from last year and nearly $30 billion from 2009, according to the USDA. And since 2000, U.S. farmland values have roughly doubled and have risen 58 percent after inflation, according to the FDIC.

For this very reason, the FDIC has begun warning of a possible bubble in the agriculture industry. The FDIC sent a letter to lenders in December warning them to not let high farmland values lull them into lax lending practices. And on March 10 it hosted a symposium in Arlington, Va., called, “Don’t Bet the Farm: Assessing the Boom in U.S. Farmland Prices.” But the FDIC is not the only agency concerned about a potential ag bubble.

“Rising interest rates often coincide with falling farm revenues and higher capitalization rates, a depressing combination for farmland values,” said Federal Reserve Bank of Kansas City President Thomas Hoenig in testimony before the Senate Committee on Agriculture, Nutrition and Forestry in February. “Moreover, even if crop prices remain high but capitalization rates return to their historic average, farmland values could fall by as much as a third, which most certainly would erode the financial health of the farm sector.”

While some are concerned, others say there is no bubble. Considerable anecdotal evidence suggests that much of the buying by farmers currently is to expand holdings to adjacent land as it becomes available. And many buyers are tapping cash reserves rather than borrowing heavily, as was the case in the 1980s.

“It is clear that farmland prices have escalated in some areas of the country,” said American Bankers Association Vice Chairman Matthew Williams, chairman and president of Gothenburg (Neb.) State. “But there is no evidence that this is being fueled by credit. Farmers are responding to market signals, and those signals are extremely positive.”

Even so, with the USDA forecasting exports to exceed the previous record set in 2008 by $20.6 billion, it does make you question how long it will last. It is also hard to ignore the fact that FDIC Chairman Sheila Bair was one of the earliest regulators to speak out on possible problems in the housing market prior to its meltdown. You cannot help but wonder, “Is she right once again?”

To read more about the current prosperity of the agriculture industry and the varying opinions on whether it is a bubble waiting to burst or not, click the links below.

Ag Boom Information

Varying Opinions

Kari English is senior editor of BankNews.

Copyright © June 2011 BankNews Media