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Farmland Values Continue to Rise And So Do Bubble Concerns
March 13 - Agricultural production and farmland loan balances at U.S. commercial banks have increased above and beyond pre-financial crisis levels. According to a report by SNL, loans secured by farmland rose to roughly $72 billion at the end of 2012, up from more than $52 billion at the end of 2006 — a 38 percent increase. Over the same time period, loans made for the purpose of financing agricultural production rose just over 19 percent, a rate less than that of farmland loans, but still above the 17.7 percent increase registered by banks' total loan and lease portfolios, SNL found.
Similar findings were announced in the February AgLetter from the Federal Reserve Bank of Chicago. The newsletter stated that Seventh District farmland values in the fourth quarter of 2012 were 16 percent higher than in 2011. And in spite of the drought last year, the annual increase for 2012 was just a notch below those of 2007 and 2011, the Chicago Fed found.
With these large increases in prices, many fear a farmland bubble could be forming.
“Farmland, Nebraska farmland in particular, is in a bubble and is vulnerable to a 30 percent setback,” warned Bruce Johnson, an ag economist at the University of Nebraska-Lincoln, in a recent issue of the Landowner newsletter. "In just five years, the value of this state's agricultural annual production rose nearly 80 percent, while annual net farm income more than doubled. At the same time, U.S. monetary policy of dollar stimulus and record low interest rates converged to make ag land ownership the new 'sweetheart' of investment," Johnson told Landowner.
Esther George, president and CEO of the Federal Reserve Bank of Kansas City, has concerns as well. She stated in a Jan. 10 speech that "we must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances. Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. A sharp correction in asset prices could be destabilizing."
Yet, other disagree. Despite the fact that Farmers National Company, an agricultural real estate and farm and ranch management company, reported 2012 sales activity was up 40 percent over 2011, the company maintains that there is not a bubble.
“The farmland market has not been highly leveraged, as residential housing markets were when prices skyrocketed. This is not a speculative market and we do not foresee any type of abrupt downturn,” said Derrick Volchoff, vice president of real estate operations at Farmers National Company. “People still see land as a safe, tangible investment and are willing to keep their money there over the long term.”
Bubble or not, according to a Chicago Fed survey bankers anticipate higher levels of land purchases or improvements in 2013 than in 2012; an indication that farmland values will continue to rise this year. The study found that 71 percent of the responding bankers expected farmland values to be stable from January through March 2013 and 28 percent expected farmland values to increase in the first quarter of 2013.
“With the USDA predicting net farm income to rise 14 percent from 2012 to $128.2 billion in 2013, there would seem to be at least another leg to be run as farmland values continue their upward race,” the Chicago Fed AgLetter stated.