WASHINGTON, January 4, 2012 -Michael Scuse, USDA Farm and Foreign Services Undersecretary-nominee received top billing at a Senate Agriculture Committee confirmation hearing last month, but it was one of President Obama’s two picks to join the board of the Federal Agricultural Mortgage Corporation – better known as Farmer Mac – that grabbed the spotlight with his thoughts on farmland values.

Bruce Sherrick, an agricultural finance professor at the University of Illinois, was peppered with questions from Ag panel members concerned about the steep rise in U.S. farmland values.

Throughout the first nine months of calendar 2011, farmland values in much of the Midwest and Great Plains posted their year-over-year gains of 25 percent or more, marking the largest annual increase since the late 1970s, according to Federal Reserve District Banks in Chicago and Kansas.

In Iowa, for example, half of the land sales last year exceeded $7,500 per acre, with more than 50 transactions topping $10,000 and even one in which a tract of ground changed hands for an astonishing 20,000 an acre, leading some to worry that farmland is in the midst of a speculative bubble.

Sherrick told the Senators he gets asked the “bubble” question a lot these days and always gives the same answer: “The fundamentals [in agriculture] appear to support current land values if you just simply capitalize cash rents in many parts of the country at very high levels.”

Sen. Pat Roberts, the committee’s top Republican, encouraged his colleagues, as well as leading business publications, to lay off the land bubble talk.

“We’re gonna talk our way into this if we’re not careful,” he cautioned.

GOP Senator John Thune of South Dakota asked if farm bankers were prepared for the inevitable correction in land prices, which he characterized as currently seeming “out of whack.”

Sherrick, who helped the Farm Credit Administration develop a stress test for Farm Credit System institutions that had its first run last fall, responded that FCS “is a highly capitalized, fairly well-run system at the moment and doesn’t face potential big problems.” Commercial ag lenders, too, are generally in good financial condition, he added.

Farm bankers learned painful lessons from the downward spiral in land prices that occurred in the early 1980s, and according to Sherrick, are aware they contributed to the collapse rather than solved it, and are determined not to become overextended during the present boom.

“Rational and responsible lenders are doing things like stress-testing or applying limits on the amount of dollars they’ll lend in per acre, regardless of the sales price,” he explained.Farmer Mac is a government-sponsored enterprise established by Congress to provide a secondary mortgage market for ag loans.

Sherrick might be one of the best qualified persons nominated to serve on its board.  He was one of the original researchers that built the first guaranteed pricing model that Farmer Mac had to evaluate its guarantee exposure on loans held in pools under their original authorities. He testified that Farmer Mac is needed now more than ever to help ag loan originators deal with increasing monetary risk, in addition to more robust regulatory requirements.     

“They’ll be faced with increasing difficulty in a sense of maintaining good and fair lending practices in agriculture as they go forward and as other banking regulations evolve,” Sherrick said, “so I think Farmer Mac being able to hold that position and provide those services is, in fact, critical to others also maintaining their behavior within authorities.”  Sherrick and fellow Farmer Mac nominee former Iowa Gov. Chet Culver, along with USDA’s Scuse, are expected to win Senate confirmation later this month.



Original story printed in January 4, 2012 Agri-Pulse Newsletter.

For more news, go to: www.agri-pulse.com