CHICAGO, Ill. Reuters) — U.S. grain farmers have enjoyed a rare combination of soaring prices and land values since 2009 but if incomes dip as expected, they should be careful not to fall into the trap of borrowing against inflated land values, the Kansas City Federal Reserve said in a report.
“In 2013, historically high farm incomes are projected to keep U.S. farm debt and leverage low. Yet longer-term projections suggest that farm incomes could fall dramatically in 2014,” the study, entitled The Wealth Effect in U.S. Agriculture, said.
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“If agriculture’s historical wealth effect holds true, farm enterprises might use existing wealth to finance and smooth investment spending, sowing the seeds for another round of debt accumulation.”
The overall wealth effect of the present boom is a warning sign, the authors say: farmers tend to accumulate more debt when wealth levels are high.
“Today, an increase in farm debt may signal the beginning of another turning point in farm debt and leverage. After rising less than one percent annually since 2008, farm debt outstanding at commercial banks rose roughly five percent in the fourth quarter of 2012 for both real estate and non-real-estate debt,” the report stated.
