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Bankers worry about high farmland values

Iowa Superintendent of Banking Thomas Gronstal told the U.S. Senate Banking, Housing and Urban Affairs Committee today that state supervisors have identified reverse mortgages and agricultural lending may have a significant impact upon the banking industry in the future.

Currently, the agricultural sector is experiencing a combination of high oil and commodity prices similar to the conditions of the 1970s, Gronstal says. "The value of farm land is directly correlated to the prices of commodities. We could be witnessing the development of a bubble in agricultural real estate."

Gronstal says state supervisors are closely watching the agricultural sector. Current agricultural conditions are reminiscent of conditions experienced in the 1970s, which led to the economic and financial collapse of the 1980s, he says.

"The dramatic increase of farmland value in the last few years makes the agricultural sector look strong," Gronstal says.

In 2007, U.S. farm land values averaged $2,700 per acre vs. $1,340 in 1998. In Illinois, the state average in 2007 was $4,460.

Gronstal testified that should the price of corn, soybeans, and other commodities decrease, the price of farm land would most likely also fall. "If there has been too much leveraged or loaned against the inflated value of farm land, the bubble will burst and we will once again experience an economic crisis similar to that of the 1980s. The continuing disappearance of manufacturing jobs from the rural Midwest will make it harder to recover from a future agricultural slump."

Testifying at a hearing on the condition of the banking industry, Gronstal said the collapse of the housing finance market has resulted in a collapse of investor confidence in bond ratings, bond insurers, and collateral valuation of asset-backed securities.

Representing the Conference of State Bank Supervisors (CSBS) on a panel that also included representatives of the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the National Credit Union Administration, Gronstal said state regulators are prepared to handle a greater number of bank failures than in recent years, although he indicated that widespread failures are not expected based on current information and conditions.

Iowa Superintendent of Banking Thomas Gronstal told the U.S. Senate Banking, Housing and Urban Affairs Committee today that state supervisors have identified reverse mortgages and agricultural lending may have a significant impact upon the banking industry in the future.

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