WASHINGTON, April 12, 2012- The consistent increase in U.S. farmland values is likely to level out in the coming years, but not through a market “bust,” said a panel of farm credit experts Wednesday at the Farm Foundation Forum.
U.S. crop producing regions, particularly in the Corn Belt, have seen values rising 25 to 40 percent in recent years, said Federal Reserve Bank of Kansas City Vice President Jason Henderson. According to the USDA, U.S. cropland values have soared more than 40 percent since 2004.
High farm incomes are spilling over into rural spending, Henderson explained, helping rural communities respond better to the economic recession. He said rural manufacturing is up 14 percent since 2009.
“We’re not just seeing it in tractor and combine sales,” he said. “Bankers say spending is in grain bins, machine sheds and upgrades of farm offices. Investments are being made across the country side.”
However, eras of low interest rates, like the one currently driving farmland values, raise concerns about the sustainability of farmland prices, Henderson said.
“Community bankers say one of the biggest struggles they’re facing is operating loan demand,” he said. “There’s a lot of intense competition in terms of lower interest rates.”
According to a Federal Deposit Insurance Corporation (FDIC) report, bankers must continually assess risk in relation to economic events, because “history has shown that rapid spikes in farm income and farmland values are followed by significant declines.”
“The national housing downturn already has led to a decline in real farmland prices in coastal states, and increasing risks in the corn ethanol industry could deflate farmland prices in the nation's crop-producing states,” warned the FDIC report.
Purdue University Center for Commercial Agriculture Director Brent Gloy said policy plays a major role in the current farmland value environment. Crop demand for biofuel production and increasing demand from international emerging markets are helping to set the stage for an environment with tight stocks and growing demand, he said. For example, increases in soybean exports to China and corn acres dedicated to ethanol contributed substantially to rising farm incomes.
These favorable conditions, including consistently low interest rates, lead to high farmland value, but Gloy cautioned that these conditions are likely to change.
“If it’s a bubble, it’s not a debt-fueled bubble,” he said.
Lenders are more cautious and interest rates are lower than they were in the housing market bubble and the farm crisis of the 1980s, he explained. Today’s farmers are also committing to land purchases backed by strong balance sheets and high commodity prices.
Gloy cited a farmland value survey of 189 respondents that showed expectations “all over the board” regarding commodity prices within the next five years, but “farmers’ expectations are likely than $5 and up is where we’re going to be.”
For more news, go to www.agri-pulse.com