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Land bubble building?

Farm land is worth a lot these days. But, are these values heading toward a bubble that's primed to burst?

Some say low interest rates and grain prices are helping build a bubble that will pop down the road while others say farmers' current ability to generate income and pay down debt has the land market on much more solid footing than the days that led up to the farm crisis in the 1980s.

The argument against an inevitable farm land value bubble is centered on farmers' ability to repay debt. Farmers are in a much better spot, in general, when it comes to this factor than they were in the days leading up to the 1980s farm crisis, says University of Illinonis ag economist Nick Paulson. If you look at things in relative terms, that is.

"Are farm debt levels really low? In relative terms, as measured by leverage, the answer is yes. Grain farmers financed roughly 10% of their assets with debt in 2009, a significant decline from the average level of more than 16% in 1996," he says. "Over the same time period, average land values in most grain producing regions have more than doubled. Given that farmland comprises a significant portion of the asset portion of the farm balance sheet, this increase in land values would naturally act to reduce farm leverage or relative debt position even with increasing nominal debt levels.

"Many argue the potential impact of a decline in farmland values would be smaller than during the 1980s farm crisis due to low farm debt levels," he adds.

But, in absolute terms -- including other variables in the repayment equation, like interest rates -- the tone is different. Recent research from the Federal Reserve shows debt has been rising, pushing repayment capacities near levels where upward adjustments in currently low interest rates could make it difficult for some farmers to pay all the bills.

"Farm debt has indeed been increasing rapidly since 2004 throughout the U.S., with this increase concentrated among younger farmers, crop producers, and larger farms with sales exceeding $1 million," Paulson says. "While the financial stress scenarios examined in the article would negatively impact all debt-holding farms, interest rate or farm income shocks were estimated to have the most severe impact on livestock producers due to relatively low income levels compared to crop producers.

"While debt has fallen in relative terms, it has been increasing fairly rapidly in absolute terms. This is especially true for term debt and among certain farm groups. Recent analysis indicates that interest rate or farm income shocks could still lead to significant financial stress for grain and livestock farms," Paulson adds.

If there is a bubble developing in the land market, at least some farmers and ag lenders are taking steps to protect themselves against a potential farm crisis. Farm Business member nwobcw says he's seen similar circumstances before, but the industry's response has been different. For that reason, he doesn't see the bubble bursting.

"I have usually gone with feelings in the 'pit of my stomach' and conversations with various people from different walks of life. Presently I have the same feelings I had back in 1979-1980," he says. "At that time, the local ag bank sent out letters to would-be borrowers detailing how one could buy $3500 land with $2.50 corn. This past late winter-early spring in their annual report, the same bank had a paragraph in the report warning farmers of over extending themselves. They are even putting more money into loan loss reserves."

In the end, though, cash and leverage are the biggest reasons why the land bubble isn't going to burst just yet, at least according to Farm Business Talk member k-289.

"Depending on how leveraged the operation is as far as forward contracting goes -- I have talked to a couple guys still delvering $4 corn -- it sounds like the ones selling $7 corn should get healed up pretty fast," he says. "Land in the heart land is still a good conservative investment, though it takes lots of cash."


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