National Public Radio’s “Marketplace” recently had an interesting piece on the current appreciation in agricultural land values.
It turns out that ag land has appreciated relative to other assets and continues to appreciate at a level that has attracted investors such as MetLife, TIAA-CREF, and John Hancock.
This in turn has attracted the attention of the Federal Reserve, and, the Fed is worried. What’s worrying the Fed is the potential fall in land value if this turns out to be another real estate “bubble.”
For those of us who lived through the 1980s’ agricultural crises this is also a concern. During the 1980s “leverage” was the downfall of many. When land prices tumbled, many could not pay the banker. Farms and rural banks failed.
Especially worrisome, Jason Henderson of the Kansas City Fed said he’s hearing about farmers leveraging the purchase of new farmland. They are using the accumulated appreciated value of their current land holdings to finance new land purchases, just like was done during the late 1970s. The question is whether we have failed to remember what happened in the 1980s when the bubble burst.
Leveraging an investment is not necessarily a bad thing if a farmer can weather a bad year or two or three and pay the notes when they come due. However, prices, the weather and land prices have to cooperate to ensure this strategy does not turn against a person.
Are some differences
Granted, there are some differences between today and the 1980s. Today we have some safety nets that were not in place during the 1980s. Crop insurance has improved considerably and for select commodities we have Direct Payments (DP).
At present, commodity prices are high and if a farmer makes a crop it’s likely there will be no problem in paying on a loan. But, commodity prices do change and individuals do experience crops losses from bad weather, insects, and other causes.
The amount of agricultural land is relatively fixed today. With demand high, prices are naturally going to be bid up. The question to be asked is to what extent is this a normal demand for ag land that’s required to produce food and fiber and to what extent is this a speculative demand that will evaporate when other investment opportunities present themselves.
Individual farms vary in the capacity to carry debt and get through the bad years. Crop/livestock operations vary in size and what they raise. Each individual entity should carefully evaluate what level of risk they can bear if times turn bad. It’s easy to get carried away with the good times, but no one wants a replay of the 1980s.
Footnote: I went to work for the Texas Agricultural Extension Service in 1981 as a green behind the ears Farm Management Specialist. Counseling farmers in trouble I naively suggested to a farmer that liquidation of assets was a possible answer to solving his financial problems. His question to me was, “Who do I sell my machinery and land to? My neighbors are in the same boat.” I didn’t have an answer then and there still isn’t a good answer to that question.
That fixed the farm crises of the 1980s forever in my mind.