What is in this article?:
- Land sales continue to break records
- Two sales in Iowa this fall topped $16,000/acre
- Federal Reserve officials warn of a price bubble
- Ag economics, farm lenders and land brokers are on the defensive as they explain the economics
Learning from the 1980s
Today’s go-go land market reminds many people of the farm crisis of the 1980s, which was spurred by high commodity prices and rapidly increasing farmland prices beginning in the mid-1970s.
But lessons learned in the ’80s, combined with the strong balance sheets of most farmers, weigh against a similar calamity in the near term, observers say.
“In the 1980s, farmers’ balance sheets had become very laden with debt,” Liddell says. “Today, farmers have historically low debt-to-equity levels.”
Lenders also are wary of a repeat of the '80s. “A number of lenders who are now in management were just getting started in the ’80s,” Liddell says. “They remember what it was like. That is why lending standards have remained relatively conservative.”
“There is no way you can’t remember those times,” says Joel Larson, a loan officer for AgStar Financial Services, a Farm Credit affiliate serving Minnesota and northwestern Wisconsin. “It left a mark on many of us. I think it has made us cautious about how we approach financing in this market.”
To reduce loan risks as land values have heated up, AgStar has begun basing loan amounts on the ability of a typical rental rate for a parcel to cover the payment. A number of farm financial ratios also are evaluated in developing a final loan package, which typically is amortized for more rapid payoff as the amount of debt increases, Larson says.
With many farm purchases now being made with hefty down payments, there’s generally far less financial risk from a drop in land values compared to the 1980s, says Brock, the Iowa land auctioneer.
“There are a lot of people leveraging 50% or less for these farms, or even paying cash,” he says. “If there was a 30% drop, it wouldn’t affect most farmers all that much.”
A University of Illinois stress test on the impact of a 30% farmland price drop concurs. It shows that the average Illinois farmer’s debt-to-asset ratio would increase only modestly from 0.24 to 0.27 with a 30% land price decrease. However, younger, more leveraged farmers would be at more risk, with debt-to-asset ratios likely to increase from 0.30 to 0.45.