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Reprinted from AgriBank Insights newsletter.

combine in fieldWhat if land values decline 30 percent or more — would we see a crisis that brings financial hardships to farmers and ranchers? Borrowers and lenders certainly need to be on alert. However, they have learned from experience and prepared for the next downturn. For a number of reasons, today’s high cropland values are very different from the farm crisis of the 1980s or even the housing bubble of a few years ago.

Here are key reasons to be optimistic that borrowers and lenders alike are in for a soft landing, not a bursting bubble, if the upward trend in cropland values reverses course:

LACK OF SPECULATORS. Farmers are still the predominant purchasers of farmland, not investors or speculators. An annual land survey by Iowa State University found that farmers made 78 percent of farm purchases in 2012. With a lack of alternative investments, producers are investing in more land. In most cases, there is a direct economic tie between the value of agricultural land and the net income derived from the value of the crops produced on it. In some cases, farmers are taking advantage of opportunities to buy land in proximity to their existing operations – sometimes paying a premium to gain control of the land as the opportunity to purchase likely will occur only once in their lifetime. Conversely, previous price bubbles in other asset classes were based on the imagined future value of a technology company or a residential property.

STRONG DEMAND. Demand for grain commodities from a growing global population remains strong and ultimately will support strong commodity price levels over the long term. In addition, net income for crop producers has increased due to improved farming practices and improved seed genetics.

CONTINUED LOW INTEREST RATES. Many farmers have locked in low interest rates with fixed rate products that will help them through a land value downturn. In addition, historically low interest rates, which have played a part in land value increases, would remain historically low even if they increase modestly.

calves eating hayPRODUCER FINANCIAL STRENGTH. While falling commodity prices will have a negative impact on crop producers, a large majority of crop producers have built strong financial and liquidity positions from recent profitable years. Lower commodity prices generally will be positive for producers and processors who purchase these commodities as inputs in the production of beef cattle, dairy products, pork, poultry and ethanol. Furthermore, many producers have invested in equipment that improves efficiency, which further contributes to their profitability and ability to ride out a downturn.

CONSERVATIVE LENDING PRACTICES. Associations in the AgriBank District — with improved capital positions and conservative lending practices over the past five years —are well-positioned for a potential drop in land values. Associations generally limit lending to 65 percent of the appraised value of farmland. Additionally, in some of the highest value areas of the District, some Associations are setting fixed dollar amount per acre limits on what they will lend — for example, lending only $6,000 per acre even if land is selling for more than twice that. The result is that the farmers who are purchasing land at higher values are making higher down payments.

So while commodity prices have fallen, interest rates are likely to rise, and land values seem headed for a correction, it’s not all dark clouds on the horizon. Across the AgriBank District, producers and lenders are generally well-positioned to weather a storm.
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