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“Recently, times have been very good in farm country,” says Sheila Bair, chairman of the Federal Deposit Insurance Corporation. And she says, “Farmland has clearly been a preferred asset class in an era when many other asset classes have stumbled as a result of the financial crisis. But the key question is, what lies ahead after this historic boom?”
Since 2000, U.S. farmland values have roughly doubled in nominal terms and have risen a whopping 58 percent after factoring in inflation, according to the Federal Deposit Insurance Corporation (FDIC), which recently hosted a symposium, “Don’t Bet the Farm — Assessing the Boom in U.S. Farmland Prices.”
A favored asset class in an era of high commodity prices, low interest rates, and ample liquidity, the agency says, farmland is attracting increased interest on the part of U.S. farmers and investors, as well as international investors. This has pushed farmland prices to all-time highs.
Does this pose a danger of farmland becoming another asset bubble similar to the one that brought the residential real estate market crashing down, or dot-com equities before that?
Or does it simply represent a reordering of relative asset prices that reflects long-term changes in global economic fundamentals? Private sector risk management and governmental financial stability policy both require answers to these questions, said Sheila Bair, FDIC chairman.
“While we don’t see a credit problem in agriculture at this time, the steep rise in farmland prices we have seen in recent years creates the potential for an agricultural credit problem sometime down the road,” she said. “And that’s precisely the sort of long-term risk that farm operators, lenders, and regulators need to stay attuned to as they carry out their day-to-day business.”
But the contrast Bair cited in loans gone sour in the commercial real estate sector as opposed to farmland is striking.
“Since the onset of the recession in December 2007, FDIC-insured institutions have charged off just under half a trillion dollars in loans and leases,” she said. These included credit card loans, family mortgage loans, commercial and industrial loans, and loans for the construction and development of real estate.
“Over this same period, net charge-offs in loans secured by farmland have amounted to just $573 million, and for agricultural production loans, $812 million.” Ag-related loans made up just under 2 percent of total industry loans and leases at the end of 2010, she said.
“Recently, times have been very good in farm country,” Bair said. “U.S. net farm income rose 27 percent in 2010 on the strength of high commodity prices and good harvests.”
And, she noted, U.S. farm exports set a new record of $116 billion. “This strong performance comes on the heels of a string of recent years in which inflation-adjusted earnings in the farm sector were the highest since the 1970s.”
Pointing to a corresponding jump in farmland values, Bair said “Farmland has clearly been a preferred asset class in an era when many other asset classes have stumbled as a result of the financial crisis.
“But the key question is, what lies ahead after this historic boom?”