Land Wealth Plugs the Profit Gap

By Marcia Zarley Taylor
DTN Executive Editor

INDIANAPOLIS (DTN) -- U.S. farmland is the savings account that is propping up ag borrowers today. Its stability is the mitigating factor keeping both borrowers and farm lenders in relatively good standing despite three back-to-back years of negative farm incomes, a growing number of ag economists and lenders say.

While some land experts forecast as much as a 25% to 30% drop from recent peak land values, most doubt a correction of that size would cause the kind of contagion that infected the farm economy in the 1980s. They believe safety valves are in place to keep any farmland distress to a minimum.

Crop and livestock incomes have plunged in unison this year, but "land values have been a blessing," University of Minnesota economist Dale Nordquist told ag bankers assembled in Indianapolis this week. He cited Minnesota Department of Revenue reporting a mere 1% drop in the state's farmland values over the past year. Likewise, when appraisers sorted through actual land sales in Farm Credit of Mid-America's four-state region at mid-year, they found real estate had barely budged from 2015 levels.

"For most farmers, it's a cash-flow problem, not a solvency problem, because land values have hung in there," Nordquist added. The ability to refinance land equity at low, fixed-rate mortgages means operators can infuse new cash into operations and most should not have difficulty qualifying for credit next year. The main issue is how much collateral they want to risk in the process, or whether they'd be better off selling small parcels of land to reduce debts.

At the moment, farmland markets have been relatively calm because very little land appears to be changing hands. What's more, distress sales are almost nonexistent. In fact, nonperforming ag real estate loans at both banks and Farm Credit institutions were running below their 1.61% long-term average in the most current mid-year snapshot, according to Farmer Mac.

Rex Schrader, president of Schrader Real Estate and Auction Co. in Columbia, Indiana, found robust auction prices in Illinois, Ohio, Indiana and Nebraska over the last few weeks. "It surprised me on the strength of sales and investor interest," he said. "It's an end-of-harvest mentality that we didn't expect." He isn't sure how long that will continue, however, and most experts see a softer market in the year ahead.

An eventual 30% drop from peak prices -- as some farm lenders have braced themselves for -- would hurt individuals, but wouldn't necessarily weaken lenders enough to trigger wholesale customer liquidations as it did in the 1980s, others believe.

"A drop on that scale could be meaningful -- and a big deal for some individuals -- but not a crisis," said Nathan Kauffman, an assistant vice president for the Federal Reserve of Kansas City.

Farmland investors have been much more conservative buyers than those in the housing market. Much of U.S. farmland this past decade has been purchased with cash or with sizable down payments. After learning hard lessons in the 1980s, ag lenders began imposing restrictions on loan-to-value ratios, or simply capping what they would finance, say $3,000 per acre when land sold for $5,000.

"Banks cooperated in this problem in the 1980s," Farmer Mac economist Jackson Takach said. "After that experience, most today said we're not doing it again."

Farmer Mac, which resells farm mortgages on the secondary market, holds an $18 billion portfolio of farm real estate. But its average loan-to-value ratio is 50%, so even a 30% average drop in national real estate levels would not put them in danger, Takach added.

"Loan performance at both banks and the Farm Credit System has degraded a little over the past year, but it's not widespread and it's not on the same trajectory as the 1980s or even 2009," he said. Ag lenders are so well capitalized today that when he stress-tested the nation's ag banks, he found most could write off more than half of their agriculture portfolios and still satisfy regulator standards for capital requirements.

"If there ends up being stress in agriculture, it's not going to be compounded by lenders," Takach said.

Another factor supporting land markets today has been the influx of institutional investors, including pension funds, insurance companies and real estate investment trusts. Low stock market returns and agriculture's long-term prospects have encouraged this new pool of buyers.

"People ran from agriculture as a sector in the 1980s," Takach said. "Now dips in farmland prices encourage those on the sidelines to step in."

Many farmland buyers are buy-and-hold investors who tend to look at their returns over decades and are less influenced by short-term results.

"So far land has been the mitigating factor in this cycle," said the Kansas City Fed's Kauffman. "If people look at the 30-year horizon, three years of low returns on farmland might be a small factor in their decision to buy." That, in turn, should keep land market and farmers' net worth afloat.

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

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