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Land a Threat To Credit?

DANIEL LOOKER 09/13/2012 @ 4:36pm Business Editor

Recently Fitch Ratings warned that the rising land costs pose a threat to ag lenders “should prices reverse quickly.”

“In the event that the long-term trends of low interest rates and rising commodity prices reverse themselves relatively quickly (a scenario not considered unreasonable), we would expect a large correction in farmland values,” says Fitch, one of the Big Three credit rating agencies along with Moody’s Investor Service and Standard and Poors. 

Fitch singled out Farm Credit System banks because they dominate ag lending and about half of their combined loan portfolio consists of farmland mortgage loans. 

“Of the four system banks, AgriBank is the most exposed to a farmland price correction, as its footprint includes the Northern Plains and Corn Belt regions,” Fitch says. 

Fitch gives System banks credit for lending far below the 85% of land values allowed by regulators. And this week, it reaffirmed the System’s long term debt rating at its highest AAA level. 

The leadership at AgriBank, based in St. Paul, Minnesota, agrees that land prices have risen rapidly.

“We probably would take issue with the statement they made that a drop in land values would cause large credit loses for lenders with exposures,” says Brian O’Keane, the bank’s chief financial officer.

O’Keane and Jeff Swanhorst, chief credit officer, say the bank is not taking chances with its land loans.

“The lenders in the district, the Farm Credit Associations, have become and continue to be conservative in their lending on real estate,” Swanhorst says. 

The bank’s district stretches from Ohio through the Dakotas and includes 60% of the nation’s cropland. 

Its associations typically limit loans to not more than 65% of the appraised value of a farm. 

In states like Iowa, Illinois and Indiana, where land values have reached $10,000 to $15,000 an acre, the associations have also set limits on loans that could be even lower.

In some areas, “they have set debt caps at $5,500 an acre,” Swanhorst says. “These folks have been around. They were around in the 1980s.”

An official with the Federal Farm Credit Banks Funding Corporation, which sells the bonds that are the System’s source of loan funds, agrees that the banks are cautious. 

“The leverage we find ourselves in now is very different from the 1980s,” says John Marsh, Managing Director of the financial management division for the Funding Corporation. USDA forecasts its ratio of outstanding debt to farmers’ cash income at 47%, far below the peak of 110% in the 1980s.

Meanwhile, Fitch continues to monitor the System’s access to funds in the bond market. The System has been acquiring capital at a low cost. 

“The system’s ratings are at the top of the scale, and there are very few financial institutions with higher ratings than the System Banks,” Fitch says.

On Thursday, CoBank, a cooperative bank serving agribusinesses, rural infrastructure providers and Farm Credit associations throughout the United States, announced that it is launching new initiatives to assist agricultural borrowers and others impacted by the 2012 drought.

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