Ag land values - cause for concern?

I was searching the Web today and came across a story published back in March of this year, where one state bank regulator raised worries about a bubble in farm real estate prices.

A state banking regulator raised a warning flag about soaring agricultural land values on Tuesday, telling a congressional hearing that the U.S. farm land bubble could burst and unleash a fresh set of economic problems. "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," Iowa Superintendent of Banking Thomas Gronstal told the Senate Banking Committee.

His remarks came before the release of USDA data on farm real estate values for 2008. which showed an overall U.S. gain of 9% this year and some corn belt states showing close to a 20% gain compared with last year. The USDA data showed California's land values were up 8.8%, with Florida's mostly unchanged and Texas up 14%. Illinois farm land was valued at a whopping $5,000 per acre in the 2008 survey, with California at $6,500 and Florida at $7,600 per acre.

The average value of farm real estate in 2008 was estimated by the USDA at $2,350 per acre, up from $1,340 in 1998.

This afternoon I visited with Tom Hill, chief financial officer of the Austin-based Farm Credit Bank of Texas. Hill assured me that agricultural lenders - at least in Texas - don't face the same worries as Fannie Mae or Freddie Mac - even though the Farm Credit Banks (there are five in U.S. farm country) are government sponsored enterprises like the aforementioned Fannie and Freddie.

I asked if the credit crisis on Wall Street will affect farm country credit.

"My observation is that there be some tightening up, but nothing as dramatic as urban consumers are experiencing, because of where we started with underwriting criteria," eh said.

Hill said the Farm Credit didn't write the kind of "no doc" and sub prime loans that have seized the credit markets and threatened the existence of various banks.


"We never left our basic underwriting criteria," he said. "While we may tighten up a little bit on advance rates - make them a little more conservative, make the terms a litter bit shorter, reinforce underwriting covenants and conditions, underwriting covenants and conditions, the impact to a good producers won't be adverse compared with the rhetoric you are seeing in the papers about home buyers," he said.

Generally, he said Hill the Farm Credit Bank was in a "much tighter range" in terms of what it advances on real estates loans. Most loans would give land buyers 70% to 75% of the land's value.
"We've never advanced 100% and it was rare that we advanced over 80%; we drifted a little bit, and current conditions will truly make us drift down a little bit," he said. " But we won't be in such an adverse swing that a good producers that has been in the market will ever sense we have changed."

Hill said land values in Texas haven't taken a hit yet, and said any declines would be linked to the run ups in real estate values that has occurred up until now. Increases in the value of Texas agricultural land have been moderate - at about 8% to 10% annually - compared with some of the states. He noted that the most drastic increase in land values have occurred in primary Midwest corn ground.

"It's no different that what happened in the housing market; if you have a run up in house values from $250,000 to $500,000 and you are lending on 90% of that, your exposure to a downturn is huge," he said.

Hill said the value of corn acreage may be vulnerable to changes in the government policy toward ethanol, which has been hotly debated this year because of high food and fuel prices.

Hopefully, I'll have more of a chance to visit with ag lenders in Florida and California in coming days (weeks?) to get a stronger sense on how lending to produce growers may be stung by the Wall Street credit crunch.