Farmland Bubble? FDIC Waves Yellow Flag At Symposium
Mar 10, 2011
No problems yet, but be careful was the basic message of the special Federal Deposit Insurance Corporation (FDIC)-sponsored symposium held today, March 10. The FDIC titled the conference: "Don't Bet The Farm: Assessing the Boom in U.S. Farmland Prices." FDIC chair Sheila Bair set the tone for the symposium by stating: "Although we don't see a problem at this time, conditions are such that a problem could develop down the line." Brent Gloy, associate professor at Purdue University added: "It's good that we are holding this meeting while we can deal with issues when it's easy rather than waiting until we are in a crisis."
Symposium speakers tended to see a favorable outlook for agriculture in the near term, but expressed concern over what could develop when net farm income retreats from current levels, when profit margins for grain producers return to more normal levels or even dip into the negative and when interest rates eventually turn higher. Research conducted at the Kansas City Federal Reserve Bank indicated a rise in interest rates and a return to more normal (higher) capitalization rates could mean a reduction in land values of nearly one third.
Matthew Williams, president, Gothenburg State Bank, Gothenburg, Neb., indicated his bank and many ag bankers well remember the lessons of the 1980's agriculture recession. His bank has restricted their lending to 60% of value. Kenneth Keegan, senior vice president and chief risk officer, Farm Credit Services of America, Omaha, Neb., said his lending institution has a lending maximum of 65% of value. Williams pointed out ag producers are also much more sophisticated in managing risk than in the 1970s through increasing use of technology, financial management (debt levels are very low) and marketing. "The major change in risk management for producers is the advent of new crop and revenue insurance products. These new products give producers risk management tools that were simply unavailable in the 1970s," he emphasized. Both he and Keegan indicated producers and ag banks are currently in very strong liquidity positions which give both groups greater cushion in the event of a financial downturn. "This spring farmers will go into planting with large cash reserves in the bank and that almost never happens," added Jim Farrell, AFM, president and CEO of Farmers National Company, Omaha, Nebraska.
Unnerving were the comments by William Isaac, chairman of LECG Global Financial Service and former chairman of the FDIC in the late 1970s into the 1980s. He drew comparisons between the nation's current economic environment and the 1970s. He said the financing of the Vietnam War and the launch of President Johnson's Great Society in the 1960s were done through deficit spending. A very loose monetary policy existed as well and the value of the dollar dropped dramatically which fueled grain exports and sent net farm incomes higher. He said the economy is again seeing the funding of wars and a broad expansion of entitlements "without any serious effort to cut deficit spending." He pointed to the current monetary policy which has driven down interest rates and the dollar. "I'm not saying there is a crisis in the ag sector. I'm saying there are warning signs," he said.
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