Farm Land Price Run-up Not Cause for Concern, At Least Not Yet
- Blog Post by: Lee Schafer
- November 5, 2013 - 9:02 AM
The financial crisis of five years ago taught us to be mindful of asset bubbles, and one of the places to check occasionally is the price of farmland.
That’s a thought shared by the banking analyst Ben Crabtree, now writing for Oak Ridge Financial. His focus is community banks, and overleveraged farm land was a disaster for many community bankers – and farmers – back in the 1980s.
What recently got his attention, he wrote in his most recent update, was when he heard from a rural banker that farmers were “beginning to use the seductive but economically indefensible thought process of ‘average cost analysis.’”
The example Crabtree used is a farmer with 640 acres that cost only $1,000 per acre. So the farmer decides he can easily afford to pay $3,000 an acre for an additional 160 acres because his average cost will still be only $1,400 an acre.
The Crabtree put it, “the math is correct, but the economics are irrational.”
Whether land prices have gotten to irrational price levels or not, they have certainly surged. Minnesota farm land values have moved up from just under $3,000 per acre, on average, in 2009 to just under $5,000 per acre now, according to data Crabtree got from the U.S. Department of Agriculture.
Farm incomes have been strong, of course, and Crabtree in checking found that farmers’ total debt-to-total-asset ratios, after peaking in the 1980s, have generally been trending down. And as for the quality of the region’s community bank agriculture-related loans, Crabtree noted, the credit quality is better now than it’s been any time in at least 30 years.
“But community banking is not done on national scope, but on a county-wide or even local basis, so what is broadly true may not be true on a more granular, farm-by-farm basis – especially when one takes into account weather patterns and their effect on crop yields,” he wrote. “Furthermore, the issue of crop prices needs to be taken into account. A reasonable farmland value when corn was $7.00 a bushel could easily be excessive if corn prices drop back to $4.50 a bushel, as some observers expect.”
Crabtree concluded that the evidence so far is that the region’s community bankers serving farm country don’t appear to be lending on irrational economics, but “the situation bears close watching.”
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