Extending the 'boom'

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Today's "golden age" of agriculture seems to be following a pattern similar to two similar periods in the past century that ended with "busts," devastating farmers and rural America.

But Federal Reserve economist Jason Henderson says "subtle differences suggest that this time could be different."

The future of farmland values is a topic of discussion among economists, lenders and others interested in agriculture, given the industry's recent high incomes, rising land values and optimistic outlook — a position that looks disturbingly familiar to students of farm history.

Today, Midwest farmland values may grow further but also face substantial long-term risks, said Purdue University ag economist Brent Gloy. At a conference last fall sponsored by the Federal Reserve Bank of Chicago, Gloy said he expected farmland values to decline "someday, but probably not anytime soon."

Farmland is not easily converted to cash, is held for a long time and is owned to produce profits, he noted. But because factors such as interest rates and inflation are hard to predict, he said, landowners may misjudge their future earnings and thus the value of their land.

For example, increased prices for farm goods encourage more production, which could bring prices and profits down unexpectedly. The resulting drop in profits would cut today's record prices for farmland.

A recent U.S. Department of Agriculture report said that the increase in value the past two years has been supported by fundamental growth in farm income, although "a speculative bubble forming in farmland markets cannot be ruled out."

But farming's dour economic history of popping "bubbles" need not repeat itself, said Henderson, who is vice president of the Omaha branch of the Federal Reserve Bank of Kansas City, Mo.

Lessons learned, especially in the 1970s and 1980s, may have translated into better financial management on farms this time around, he said, making the "bust" part of the cycle less likely or at least taming the down cycle so it will be less disruptive.

The biggest lesson was that excessive use of debt weakens farmers' finances so they can't recover when bad things happen, such as high interest rates or falling prices due to a drop in world trade or unexpected bumper crops.

"The current period of prosperity is different, as farmers have not used debt to expand their capital expenditures at the pace of past farm booms," Henderson wrote in an article for the Kansas City bank. "The question remains, however, whether this will be enough to alter agriculture's boom and bust cycle."

The previous boom periods were in the first two decades of the 1900s, when farmland prices grew by 70 percent, and the 1970s and early 1980s, when land prices grew by nearly 80 percent. Each time, crop prices fell, interest rates rose and land prices dropped sharply.

Henderson said the current boom period is "quite similar" to the early years of the past two cycles. Demand for food and biofuel strains supply, pushing up crop prices and raising farm income 30 percent both in 2010 and 2011. Farm exports in 2011 were double 2005's volume, and ethanol production used roughly 40 percent of the U.S. corn crop.

Farmland values hit a record in recent months because of the promise of high income supported by low interest rates. Relatively little farmland has come up for sale, partly because alternative investments have been unattractive.

But compared with the past farm cycles, there's a "striking difference" this time, Henderson said: capital investments, such as tractors, grain bins and irrigation systems.

Capital investments and related debt grew much faster in the 1970s than did farm income. But in recent years, he said, capital investments have increased at about the same rate as farm profits, and farm debt has increased only slightly, holding steady since 2009 at commercial banks and increasing only 3 percent in the past year at the Farm Credit System.

Henderson said huge new capital investments would be spurred only by a technological breakthrough, such as the rise of the tractor in the early 1900s or the high-capacity farm machines of the 1970s.

One reason farmers are keeping debt under control is that bankers are more careful about lending than they were in the 1970s, said Jeffrey Jensen, director of the West Des Moines office of the Federal Reserve Bank of Chicago. For example, bankers now can use "stress tests" on borrowers and their own banks to make sure they are not taking on too much financial risk.

Government regulators also are working to ensure that banks remain safe and sound, establishing "best practices" for banks to follow, Jensen said.

Great Western Bank officer Kim Greenland said only a small percentage of farmland is changing hands, and buyers typically make hefty cash payments toward the purchase price — a healthy situation if land values fall because most landowners would not owe more than the land is worth.

Leland Strom, chairman and CEO of the Farm Credit Administration, said that even though farmland prices continue to grow, farm debt held by commercial banks and the Farm Credit System was lower in mid-2011 than at the end of 2010. That's partly because Farm Credit lenders limit loans based on farmers' repayment capacity, make shorter-term loans that are more conservative and regularly check borrowers' loan risks.

Iowa State University economist Michael Duffy said 70 percent of those buying Iowa farmland in 2010 were farmers and about 25 percent were investors. If investors buy more and more farmland, that can be a sign of speculation and unstable prices.

He said 40 percent of Iowa's farmland was farmed by its owners in 2007, down from 55 percent in 1982. The trend is partly demographic, as farm owners age and turn the work over to younger non-owners.

Overall, the Chicago Federal Reserve said, the consensus at the conference was that "sound economic fundamentals undergird the recent large increases in agricultural land values."

Contact the writer:

402-444-1080, steve.jordon@owh.com

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