Tuesday, April 5, 2011

Banks Lending to Farmers Are More Profitable

The Des Moines Register is reporting on profits of banks lending to farmers, but along the way, remembers the land boom in the 1970's:
The average price for an acre of Iowa farmland was $5,707 in March, up 25 percent from a year earlier, according to a survey by the Iowa Farm & Land Chapter of the Realtors Land Institute. The all-time high - adjusted for inflation - is $5,711 per acre in 1979, just before the farm crisis. Land prices rose sharply in the 1970s thanks to high commodity prices, inflation, easy loans and - later - land speculation by investors, according to a report on the crisis from the FDIC.

Farmers took on massive debt to expand, using land as collateral. They borrowed from banks, but also from life insurance companies, the federally backed Farmers Home Administration and the Farm Credit System, which was by far the largest farm lender.
Much the way lenders in the 2000s believed home values would always rise, farm lenders in the 1970s failed to foresee a drop in farmland prices. Bankers loaned on faith that the land's value would keep climbing. Getting a loan was easy.
"In the early '80s, we hadn't really heard of cash flow yet," said Greenland, who began his career as a banker in 1982.

When the Federal Reserve raised interest rates in 1979 to combat inflation, farmers projected lower profits and land prices began to sink. Then President Jimmy Carter imposed an embargo on grain sales to the Soviet Union in 1980, and commodity prices tumbled. Existing farm debt, which had quadrupled nationally in the 1970s, became crushing for farmers when adjustable-rate loans reset at twice or three times the interest.

Hopefully, we can avoid the mistakes of the past.  But it unnerves me to hear people talking about how they don't make any more land, and that with all the demand grain prices won't go down.  As soon as things look inevitable, everything changes.  It is good to see that debt levels are much lower today than they were in the 70's.  Still, it feels like a bubble to me.

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