Soaring U.S. farmland prices remain a cause of concern for many bankers and policymakers, but the forces driving gains nowadays are different from the debt-driven farmland crash in the 1980s, Kansas City Federal Reserve president Esther George said on Tuesday.
George, who flagged concerns about a potential farmland "bubble" in remarks earlier this year, has argued consistently for higher interest rates and an end of the Fed's easy money policies. But in remarks to a gathering of bankers and business leaders at a conference here, she expressed confidence that both farmers and banks had learned and remember the hard lessons of being "over-leveraged" in the 1970s. When the Fed raised interest rates sharply in the 1980s to subdue inflation, thousands of farmers were pushed into bankruptcy as land values popped and collateral for their bank loans collapsed.
"One of the things I've talked about are ag land values and the really extraordinary levels of which we see sales continuing to occur in markets in this region," George said. "Certainly we know that global demand for the commodities has driven the values there. We also know that looking for return can be a contributor to some of that value as well."
The Kansas City district, which stretches from Missouri and Kansas to Nebraska and Oklahoma, is home to thousands of farmers and is a leading producer of wheat, corn and cattle, among other farm commodities. The value of farmland has soared to all-time highs in recent years, selling for $10,000 an acre more in the top growing regions of the district.
"Today's landscape and the amount of leverage that we saw in the '70s in the farm sector seems to be absent today. I trumped that up to some lessons learned," she said, referring to the 1980s farm crisis.
"You will find that some of our ag banks clearly remember some of the issues they faced with collateral-based lending. So in the banking industry we do not see the levels of leverage that characterized what we saw then."
While the conditions driving farmland prices higher differ from the 1980s, the KC Fed will continue to watch for any unusual rises in credit loads for large farm operations, given, for example, the rising share of lending to non-bank sectors such as equipment or seed suppliers.
"There's a lot of cash. We see more equity going into some of these deals," George said. "We have seen some very large consolidated operations that developed exposures, not just bank lending, but in some cases vendor financing."
Overall, given the pay downs of farmer debt - led by grain farmers the last five years as ethanol and exports fueled record prices - George said the chances of a repeat of the 1980s debt and farmland bubble were slim. But higher interest rates might affect demand and soften prices, so any "correction" in land prices as monetary policy strengthens could be expected to work its way through the farm economy, although in milder ways.
"The run-up in the land values is likely to still create issues for those that are exposed in some way," she said. "Will we see it as broadly as we did in the '70s? Not the same scenario. But we will still see some fallout if there is a strong correction."
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