Farm debt not a problem | Biggest threat to land values is potential for rising interest rates
CHICAGO, Ill. — American farmers are not perched on top of a farmland price bubble, say land experts.
Farmland sales of $20,000 per acre in Iowa have spooked growers. They wonder if they’re experiencing some-thing akin to the housing bubble that led to financial turmoil in the U.S. economy when it burst.
But what is happening with farmland prices is an entirely different scenario, said Doug Stark, president of Farm Credit Services of America (FCSA), a lender for farmers and ranchers in Iowa, Nebraska, South Dakota and Wyoming.
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His company tracks 66 benchmark farms in the four states where it operates. The farms in Iowa, Nebraska South Dakota and Wyoming have experienced an appreciation in value ranging from 271 to 293 percent over the past 10 years.
And the annual rate of growth hasn’t slowed. The 20 benchmark farms in Nebraska experienced an average increase in value of 47 percent be-tween July 1, 2011, and July 1, 2012.
Stark isn’t concerned about land values imploding because the run-up in prices hasn’t been accompanied by an increase in farm debt. A lot of growers are buying property with cash.
“That’s great because we’ve already made the money and are investing in farmland as opposed to hoping for the future return to come and repay loans and debt against those lands,” Stark told delegates attending the DTN/Progressive Farmer Ag Summit 2012 Dec. 11.
Seventy-eight percent of the FCSA’s $8 billion in long-term real estate loans have a loan-to-value ratio of less than 50 percent.
That means there is plenty of equity in the land and FCSA’s clients would be in the black even if land values fell by 50 percent.
“We don’t believe this is anything like the 1980s, nor is it anything like the housing bubble that we’ve experienced,” said Stark.
Howard Halderman, president of Halderman Real Estate in Indiana, said farm value depends on farm incomes, interest rates and the supply of land for sale.
“I would argue in the near-term all three of those are bullish farmland,” he said.
New farm income records are being established every year, although 2012 could fall slightly short of a record because of poor performance in the livestock sector.
Interest rates are extremely low and the number of farms for sale in the eastern corn belt is about half of the typical three percent.
What could turn things upside down is a strengthening of the U.S. dollar, a deepening of the global recession, the loss of biofuel mandates and lower demand in the livestock industry because of high grain prices.
“I don’t know if we’re necessarily in a bubble, but we could see land values fall 20 to 25 percent if those scenarios all played out,” said Halderman.
Stark said the biggest threat to land prices is rising interest rates. He showed producers a scenario where land values in northern Iowa would fall from $15,931 to $5,310 per acre if rates increased to six percent from two percent.
The scenario was based on the assumptions of $4.50 corn, which is FCSA’s long-term projected value for the crop, and average Iowa yields of 200 bushels per acre.
Stark worries that growers are getting comfortable with today’s low interest rates and think they will be around forever.
“Mark my words. You’re seeing the lowest interest rates right now you’re going to see in either your lifetimes or your careers,” he said.
Producers probably have some time before interest rates increase again, but Stark advised locking in long-term fixed rates on their land for 15 to 20 years.
“It’s no different than your commodity markets. Once it starts moving, trying to catch it on the upswing is going to be really difficult to do,” he said.
The fixed rates may be above the variable rate for the next year or two, but they should be well below the going rate for the duration of the loan. Three-quarters of FCSA’s real estate loans are fixed rate loans.
He also advised farmers to manage their risk by maintaining strong working capital.
“If you do those two things, you’ll be well positioned to take advantage of opportunities,” he said.
Stark is forecasting a continued increase in land values in the short-term, but nothing is certain.
A second consecutive drought in 2013 that keeps grain prices high could temporarily push land values higher, but the long-term consequence would be a devastated livestock industry and further drop in demand, which could prove problematic if there is a big crop in 2014.
And what if there are two bumper harvests in 2013 and 2014 that result in two billion bushels of corn carryout? That could drop corn prices below $4 per bushel. If it was combined with a hike in interest rates in 2015, it could vastly reduce land values.
“I’m not sitting up here saying that’s going to happen, but I’m just saying there’s a probability that the stars could align themselves very differently than they are today,” he said.
