Farm land bubble in the making?

W_B · Mar 5, 2013

Another real estate bubble just waiting to burst?...

Agricultural production and farmland loan balances at U.S. commercial banks have increased above and beyond pre-financial crisis levels, according to an analysis by SNL Financial.

Farmland lending has grown from over $52 billion in 2006 to over $72 billion at the end of last year, while ag production lending has grown just over 19% for the same period. Total bank loan portfolio lending rose 17.7% over the same period.

Farmland values have increased right along with farmland loan balances, so much so that many fear a farmland bubble in the works. The Federal Reserve Bank of Kansas City reports that "...crop land values posted year-over-year gains of more than 20% for the seventh consecutive quarter … ranch land values surged nearly 20%." The Federal Reserve Bank of Chicago reports that the district's 2012 annual increase of 14% in agricultural land values was the third-largest increase in 35 years, after adjusting for inflation.

Roger in Iowa · Mar 5, 2013

Is the increase in lending due to land purchases or is it the increased cost of production, i.e. fertilizer, rent, seed, equipment?

Bob Bancroft · Mar 5, 2013

Looks like both. Land loans up about 38.5%. Production loans up 19%.

Mike M · Mar 5, 2013

Maybe sort of related ?

I have been seeing some of the local Amish farms clear cutting off some small woodlots (not very big trees)and having the stumps dug out.
Just waiting to see if it will be for crop production or to put up more houses for the kids ? They are getting alot of houses on these smaller farm parcels.

Anonymous-0 · Mar 5, 2013

I wonder how these figures compare percentage wise to the early 80's before the bust. It appears that in our area of the central corn belt that a lot of the ground is being bought for cash or not much of it borrowed. A lot of the old money farmers have accumulated a lot of cash over the last few year's with good crop's and high commodity prices, and are spending on land. But I agree I don't think if will last forever.

LAA · Mar 5, 2013

Can land values go down across the board and leave some people in a bind? of course, but it is not going to be the same as the housing market crash because in general the people that owe the money for the farmland have more assets and are much more likely to pay the money back than the majority who defaulted on single family homes these past several years. Federal government policy wholly created and exerbated the housing crash, not that they learned anything because they are at it again.

Traditional Farmer · Mar 5, 2013

Every crash has one thing in common there are always a large group of people that say "Its different this time".The US Dollar/bond market is the bubble now that is the ultimate threat so how that affects everything else when it crashes is anyone's guess.If the Fed continues to pump over a
Trillion$ a year into the money supply then money will be worth less and less making loans easy to pay off and there is no indicator that the Fed is going to stop since they are 'buying' the Lion's share of the National Debt indirectly thru the large banks

Mike (WA) · Mar 5, 2013

At least when I worked for Farm Credit/ Federal Land Bank, they were bright enough to get additional collateral, so they should be covered even if there is a big drop in value. So a bubble would sure be a problem for the guys losing their property, but not as big a problem for the economy because the lenders wouldn't be going broke like they did with the housing bust.

And lets face it, commodity prices are not likely to take a big tumble, because worldwide demand will continue to support the prices. And that foreclosed farmland will surely be farmed by somebody.

Gambles · Mar 5, 2013

I watched "60 Minutes" the other night (I know, I know. I didn't want to, but I did) and I don't think the U.S. will be the only country that will be having a real estate problem. China changed their laws a few years ago that allow their people to own real estate. So all of their people are now investing in high-rise office complexes. There are miles and miles of sky scrapers that are sitting empty. I believe that we buy so much junk from them that if they have a real estate problem, it will have a domino effect and make our problems hit harder and faster. We don't want to admit it, but we do have a global economy.

Spook · Mar 5, 2013

We had a golf course built here, about 12 years ago. Multi million dollar deal, designed by some famous designer / golfer. Right off I96. It went bust about 5 years ago, and has been for sale. A local farmer has bought it, they are bulldozing the ground back level, and are putting back into crops. The original plan was for a golf course community, I think the local development folks are having fits over this.

sotxbill · Mar 5, 2013

Clinton admin encouraged loan policies for first time owners that were very risky and even to those would should have never qualified. Thus the economy slows a bit and you have total wreckage.

How many unqualified first time farmer are out there? I dont know if it will be the same...

However.. lots of long term farmers are pulling the string tighter and tighter, the borrowing each time gets to be a bit more, and takes a bit longer to pay back. This would be a much much much bigger problem if this bubble breaks. dont see tons of young farmers lined up to take their places. We only raise xbox and nintendo players, not farmers.

NY 986 · Mar 5, 2013

I would say erosion of values for sure. Most of the high priced purchases were made by older well off farmers. New younger farmers will not have the resources to bid values as high due to the need of more financing along with less equity. The government will come into play as they will see these high valued farmers as a source of revenue to help with the federal debt. High property taxes with soon to come local income taxes will make land a less attractive investment compared to other investment types driving values down.
The possibility of a collapse does exist especially if a series of political events helps precipitate a collapse in the commodity markets. There will be far fewer foreclosures and bankruptcy as banks have insisted on higher down payments and equity levels. Still the possibility exists for severe erosion of the balance sheet in short order.

Wile E · Mar 5, 2013

As long as the banks/lenders demand a 20% down payment for the land/home/business then it would not be the same type of mess that hit the single family homes.
I think the real problems that happened a few years ago were due in part to banks allowing unqualified borrowers to "buy" homes with no money down and home equity loans to buy junk and not prove that the money was used to improve their homes.

Aaron SEIA · Mar 5, 2013

From what I've heard from a banker friend of mine, they are only loaning up to around $3,500, the other 3-5 grand is coming from cash. As long as prices stay where they are, it'll be ok. The farmers left will be ok. That said, I wouldn't want to be using land as a pure investment right now.
AaronSEIA

dhermesc · Mar 5, 2013

I would agree. Back in the 1970s loans were easy and anyone with pulse could get one for farm land - real similar to the housing bubble a few years ago. Today getting a loan for farmland is akin to a trip to a proctologyst that moonlights as a Roto Rooter operator.

oldtanker · Mar 5, 2013

(quoted from post at 14:10:32 03/05/13) Clinton admin encouraged loan policies for first time owners that were very risky and even to those would should have never qualified. Thus the economy slows a bit and you have total wreckage.

How many unqualified first time farmer are out there? I dont know if it will be the same...

However.. lots of long term farmers are pulling the string tighter and tighter, the borrowing each time gets to be a bit more, and takes a bit longer to pay back. This would be a much much much bigger problem if this bubble breaks. dont see tons of young farmers lined up to take their places. We only raise xbox and nintendo players, not farmers.

You hit the nail on the head about the housing markets when Clinton farced lenders to accept welfare as income for home loans.

The problem now is some of these farmers who have thieir necks streched out over these land prices are going to come up short if the grain prices drop. And they can drop. Each year more and more land is coming out of CRP plus with the budget cuts looming how much longer is the CRP programs going to run. All it will take to burst the grain price bubble is a good year across the nation for crops and too much to sell. It's happened before and can happen again. How many on here are planning on putting in more corn than you did last year?

Rick

scotc · Mar 5, 2013

And whoever came up with the "interest-only loan" should be drug through the streets and shot. My aunt was watching one of those "find a new house" shows on TLC or something and the young couple couldn"t believe how upside-down they were on their house because of the interest-only loan.
HHHEEEEEEEELLLLLLLLLLLOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!

moresmoke · Mar 5, 2013

I'd be interested to know what percentage of
farmland loans are made to investors, and how many
to farmers. As someone else said, these parts many
of the farmers buying land are paying with cash.

MarkB_MI · Mar 6, 2013

Well, a 30 year fixed interest rate loan is for all intents and purposes an interest-only loan if you sell in the first ten years. If someone is under water on the mortgage, it's not just because they took out a balloon mortgage. The property value has to have fallen. After all, if you borrow 90 percent on a 100,000 house, even if you don't pay any principle you still have 10 percent equity IF the value hasn't dropped.

Actually, where most folks got into trouble was with VARIABLE-RATE mortgages. They got sucked in by "teaser" rates, only to find they couldn't afford the real interest rate. Lots of people went underwater on their mortgages, but the ones who had fixed interest rate mortgages just rode it out.

Of course, the dumbest thing anyone came up with during the bubble was the "negative amortization" mortgage. I have no sympathy for those who took out these loans, and even less sympathy for the banks who issued them.

MarkB_MI · Mar 6, 2013

It's true that farmland prices are at an all-time high. But what's driving them up? Two things: High commodity prices and low interest rates. As long as both of these hold, prices will continue to rise.

Texasmark1 · Mar 6, 2013

Lot of investment advice to get into something tangible and
real........like REAL ESTATE since as others have stated the market
is an unknown and interest rates suck....courtesy the fed being
easy on the adm and the nat. debt. Course that is a tax you and
I pay and no one mentions it. Rather than making a reasonable
return on our savings, we get $crewed again as usual and the
reason is so that the fed can finance it's bloated spending
habits.....but shhhh we aren't supposed to know that.

So, just like stocks and the price of oil, speculation at it again.
Course when the glass breaks they all run and somehow knew
the day before to get out with their money.

Course unlike you and me these guys have analysists, rooms of
computers tracking this and that, meetings with other know it
alls and all.

We don't have a chance and guess who's money they are stuffing
in their pockets.

Mark

Farm land bubble in the making?

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