Agriculture has always played an important part in Jeff Plagge’s life. After growing up on a farm in central Iowa, Plagge, the soon-to-be chairman of the American Bankers Association, studied agricultural business at Iowa State University.
“Right out of college I spent about seven years with Production Credit Association, which was an arm of Farm Credit System in Council Bluffs and Webster City,” said Plagge.
Today, he is president and CEO of Northwest Financial in Arnolds Park, Iowa. Northwest Financial is a three-bank privately held financial services company with about $1.6 billion in assets. With many of Northwest Financial’s branches located in rural areas, Plagge keeps close tabs on the ag industry and shares his opinions on the ag bubble below.
What are the main crops grown in your area?
“We still have some livestock sectors and some alfalfa but it is primarily corn and soybeans. We have some swine and beef and some poultry – although poultry is a fairly integrated business anymore and swine is getting more that way – so a lot of the swine in our market and in a lot of markets is more custom feeding of hogs.”
Has loan demand continued to be stagnant or is it increasing in your area?
“We have continued to see growth in loan demand in the last few years but it’s probably more resulting from the fact that even during the downturn we continued to work at growing portfolios and calling on customers and prospects. So what I would call the organic current customer loan demand is still pretty tepid. And that’s more of a reflection I think, of people trying to feel their way through this economy. But certainly the attitudes we have seen are certainly improved from the standpoint that businesses seem to be moving forward.
“We are in agricultural country and we are right in the heart of Iowa, which is obviously a huge agricultural state and the farm sector, for the most part, has enjoyed a very strong three years of profit. So some of that loan demand — or lack of loan demand — is for good reasons; with the ag sector, they have had very strong profits and have been using more of their own cash and capital and borrowing less.”
What do you think about the boom in the ag industry?
“I don’t think there is any question that land values have bubbled. The fundamentals behind them, though, is what is significantly different. We’re in northwest Iowa, which is the highest-priced land. Literally, some of the highest priced land has been in our market territory — $20,000 an acre sales.”
Is the industry headed the other direction anytime soon?
“I was a senior lender during the ag crisis so right in the heart of it. Fortunately, I was at a bank where we didn’t have big problems and we never lost money. I think back to those times, it was really a precursor to the housing bubble. Some of the same fundamentals — we had customers back then buying very inflated land, buying it on high-percentage finances and at that time we also put in a dramatic jump in interest rates.
“The fundamental problem behind those times was just lack of income in the farm sector. With a combination of lack of income, leveraged financing and high interest rates we were just on a collision course. Not unlike what we saw on the housing side — people buying houses beyond their means, assuming that housing was always going to go up so they were leverage financing it and in some cases heavy second mortgages and third mortgages, which we also saw in the farm sector in the 1980s.
“We just see none of that right now. Some of the highest-priced farm sales we have seen in this part of the country required no financing. It was people who just elected to put cash in a different bucket than in the past. And we’re seeing high profitability and we’re seeing some of the lowest interest rates we’ve ever seen.
“Will there be some exceptions? Will there be some farmers who did some things collectively with land that got themselves too leveraged? Yes. That’s the cycle of any industry. But as a bubble, I just don’t see it.
“There has also been a lot of capital spending on machinery and equipment and bins and those kinds of things so there may actually be more leverage on those sides of the balance sheet than the land side.
“I think the other thing people forget is that as a percentage of the total there is still very little land that changes hands in the farm sector. Yes, there are some farmers that have bought more land but the majority of farmers have not bought more land during this cycle.
“All that said, the run-up in prices is absolutely stunning.”
Is it going to stay high?
“I think we are already seeing some signs of it backing up a little bit on some recent sales. I think some of that is related to $4–$5 corn instead of $7–$8 corn.
“The outcome of this farm price bubble will be that there will be some farmers that wake up some day and say ‘boy, I probably overpaid a little bit on that last farm’ but it isn’t going to put them out of business. They bought it with cash or very little leverage financing and they bought it with a long-term view. Farmers, by their very nature, aren’t speculators when it comes to land. They are buying it for a long-term view and in a lot of cases for the next generation and so forth. So they don’t tend to look at prices year-to-year. They look at it more as an asset for their overall operation.”
Did slowdown in the production of ethanol hurt farmers in your area?
“We haven’t seen much impact in this area. We’re a fairly mature ethanol area. It’s helped in the long run — 10–15 years — it has certainly had an impact on prices and competition with the commodity.
“I think farmers are kind of used to the ups and downs of the ethanol chain. We haven’t seen any crash and burns with ethanol. Obviously, there has been a substantial slowdown in new construction over what there was five to 10 years ago. But I think a lot of those are up and running and don’t have the leverage either and so they can go through cycles in a lot better fashion than maybe when they were earlier in their maturities.”