Throughout the run-up in farmland values, the Federal Reserve Bank of Kansas City has been a consistent and vocal voice of caution and warnings concerning a potential farmland bubble. Those warnings came initially from former Bank President Thomas Hoenig and continued under current President Ester George. That's why it comes as a bit of surprise that President George now lists as slim the possibilities of a 1980s-stlye debt and farmland bubble.
In a story written by Christine Stebbins for Reuters, George is quoted as saying: "Today's landscape and the amount of leverage that we saw in the '70s in the farm sector seems to be absent today. I trumped that up to some lessons learned," she said, referring to the 1980s farm crisis. You will find that some of our ag banks clearly remember some of the issues they faced with collateral-based lending. So in the banking industry we do not see the levels of leverage that characterized what we saw then."
That's not to say George sees farmland escaping completely a decline in farm incomes and a rise in interest rates. "The run-up in the land values is likely to still create issues for those that are exposed in some way," she said. "Will we see it as broadly as we did in the '70s? Not the same scenario. But we will still see some fallout if there is a strong correction."
Some may feel this is a sign of top in the farmland market when a major "bear" throws in the towel. That's not how we see it. We see it as the Fed doing its job to constantly remind farmers and ag lenders of the pitfalls of highly leverage land purchases. If farmers and land investors can continue to restrain their use of debt over the next two to three years as interest rate rise and net farm incomes decline, then the industry has a good chance of working through the inevitable correction in farmland values.
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