Land Price Bubble Ahead?
Low debt positions farmers well if prices "correct" themselves
P.J. Griekspoor
Published: May 19, 2011
Farmland values are up substantially from a year ago, as much as 20% in some areas, according to Jason Henderson with the Omaha branch of the Kansas City Federal Reserve.
Net farm income is also up substantially, Henderson notes. “We’re seeing strong capital investment in light of the income,” he says. “Sales of farm machinery are very strong. When farmers have money, they buy machinery. They also buy, or try to buy, that piece of property they’ve been wanting.”
Dry weather this year has somewhat limited land demand in Texas, Oklahoma, Wyoming, New Mexico and Colorado, Henderson says. But even where drought makes investors wary of land for farming, there is another driver for land sales in those areas: oil exploration.
“There are even three drilling rigs active in Nebraska right now,” he says.
So, is there a bubble? Are we heading toward a 1980s-style crisis?
Henderson doesn’t think so, although he says he does expect a market correction in land prices.
“Ag faces a huge interest rate risk at this point,” he says. “Interest rates are at historic lows and that tends to increase the demand for land. Higher interest rates tend to reduce the demand for land as investors can find other instruments with a higher rate of return.”
Henderson says there is less risk to farmers in this era of high land prices than there was in the 1980s because today’s farmers are carrying very little debt and they have not leveraged money based on land value.
“Credit is not an issue for farmers today. They have paid off their operating loans and the demand has shifted from operations to equipment and machinery loans. Rural banks report that loan demand is low and they are lending at historically low rates.”
The only delinquency problems being seen in the farm sector are in livestock, Henderson says, where the dairy sector has seen higher delinquency rates, as have some cattle feeders.
“For most farmers, cash is still king,” he says. “They are maintaining working capital and keeping leverage low. That builds in a shield to help them manage volatility that goes along with today’s markets.”
Henderson says he sees exports of agricultural products remaining strong and the question of China buying more feed grains, including corn, from the U.S. is a matter of “when” not “if.”
He says he expects that demand to keep corn prices at high levels, but that it should have less impact on the livestock sector because wheat stocks are high and attractively priced feed wheat is readily available. --Griekspoor writes for Farm Progress sister publication Kansas Farmer.
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