Farm Credit Watch: Was rural America set up for another farmland bust?

IIs history about to repeat itself? In rural America, that could be the case, as the Federal Reserve is acting too aggressively to raise interest rates to deflate the inflation that has erupted in recent months. Older farmers and ranchers, and bankers, who have studied financial history (or lived through it) remember the farm crisis of the 1980s when the Fed raised interest rates to record lows. to reduce the rate of inflation. Given the rise in farmland prices in recent years, in part due to very low interest rates, sharply higher rates could burst the increasingly obvious farmland bubble.

The Fed’s very low rates in recent years, coupled with “quantitative easing”, which has lowered rates across the yield curve, have helped inflate farmland prices, as documented various reports. For example, the Federal Reserve Bank of Chicago’s May 2022 AgLetter reported that its district saw a 23% year-over-year gain in the value of its farmland in the first quarter of 2022.”

A chart released by the Federal Reserve Bank of Kansas showed that after a slight decline in farmland prices in the middle of the last decade that bottomed around 2017, farmland prices began to see significant annual increases. . On an inflation-adjusted basis, farmland prices in the Kansas Fed District last peaked in 2013 and nearly doubled from 2009.

The FinancialTimes reported on April 7 that “Land values ​​in the Midwest Grain Belt have increased 25-30% over the past year as auctions draw intense bidding for available land.”

In the years leading up to the farm crisis of the 1980s, farmland prices, which had nearly doubled on an inflation-adjusted basis since 1971, crashed, leading to thousands of farm bankruptcies and economic distress across the country. rural America.

A variety of factors contributed to inflating this bubble, including the liberalization of collateral practices within the Farm Credit System authorized by the Farm Act of 1971. Far worse, FCS institutions set their interest rates on loans based on their cost. average of funds, which meant that in the rising interest rate environment of the late 1970s and early 1980s, the FCS constantly undervalued its loans, further inflating the farmland bubble.

Over the past few weeks, the Fed has started to hike interest rates – the question now is how fast and how far. These rate increases, however, come at a particularly difficult time for U.S. agriculture, as inflation drives up the cost of a wide range of farm inputs, a situation compounded by supply chain challenges for these. month.

Worryingly enough for many areas, from California to the Mountain West and parts of the Midwest, is a severe drought, “about as bad as we’ve ever seen,” according to a Kansas banker. The severity of the drought, its extent and duration is the big unknown.

Two other uncertainties affecting farm income, and therefore farmland values, are the outlook for federal government payments and the effect of the war in Ukraine. The U.S. Department of Agriculture’s Economic Research Service has predicted a continued decline in direct payments to farmers by the federal government, with payments in 2022 expected to be just over half of what they were in 2019. ; this outlook is hardly positive for the value of farmland. While the war caused a global spike in wheat prices, this effect on farm incomes may be quite transitory.

History will hopefully not repeat itself, with rising interest driving down farmland values ​​and triggering an increase in farm bankruptcies, but given the virtual certainty of significantly higher interest rates over the coming years, now is the time for agricultural lenders, including the FCS, to be particularly cautious in forecasting farmland values ​​over the very long term.

Consolidation continues within the FCS

Two recent announcements demonstrate continued consolidation within the FCS that is leading to FCS associations that are larger and further removed from their member-borrowers than ever before. Currently, there are 65 FCS associations, ranging in size from $37.8 billion (FCS of America) to Delta ACA of Dermott, Arkansas, with $33 million in assets. Here is a link to a list of loans and total assets for the 65 associations as of March 31.

Two mid-Atlantic associations – AgChoice of Mechanicsville, Pennsylvania, and MidAtlantic Farm Credit of Westminster, Maryland – will merge to form a new association that will have approximately $5.85 billion in assets, making it the 11th largest association. At the other end of the scale, Delta ACA is so small that it could not find a merger partner. Consequently, it is being liquidated and its loans transferred to another association.

Considering all the consolidation that has occurred within the FCS, as of March 31 of this year, the six largest multi-state FCS associations held just over half of the total assets of the 65 associations. The median-sized association had $1.44 billion in assets, and the bottom half of associations, by asset size, held less than 10% of the association’s total assets as of March 31.

Consolidation will undoubtedly continue within the FCS, especially in areas of the country, such as Texas, the Low Plains states and the Southeast, where smaller associations tend to be concentrated. One of the troubling consequences of all this consolidation has been the emergence of a few very large associations—10 now have over $10 billion in assets—that will be difficult for the Farm Credit Administration and Farm Credit System Insurance Corporation to resolve if a large association experience financial difficulties. As the previous article pointed out, rural America is not immune to another round of financial hardship.

Although it is easy to see on the map of FCS associations the extent of the consolidation that has occurred, the FCA does not publish data on the number and location of FCS branches, but as the associations they -these have reported occasionally, they have consolidated and branch closures. Not only are office closures driving FCS lenders away from the farmers and ranchers they lend to, but these lenders are likely to be less in touch with local agricultural conditions, which could increase the risk of FCS loans, particularly on the lending market. agricultural real estate.

Editor’s Note: If you have any questions for Bert, feel free to email him at [email protected]

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