In the past, farm real estate debt and farmland values followed each other closely. Research points to the farm real estate bubble of the 1980s and subsequent crash being related to and likely caused by too much debt (for a more extensive review of the farm debt crisis see Calomiris, Hubbard, and Stock, 1986; and Harl, 1990). Much of this debt was provided by the Farm Credit System, individuals selling land on contract and commercial banks.

During the 1970s, farmland values surged with burgeoning farm incomes. Strong global economic growth of the 1970s spurred rising farmland values (Henderson, 2008). According to the International Monetary Fund, world GDP growth was around 4.5 percent annually during this time period. Higher incomes in developing countries spurred an increase in global food consumption, which occurred at a time when the value of the U.S. dollar was weak. With high demand and relatively cheap prices, U.S. agricultural exports surged, lifting farm incomes. Moreover, new export markets opened with the 1972 Russian grain deal, further boosting farm incomes and expectations for further income gains. These future gains were capitalized into the value of farmland as evident by real U.S. farmland values rising to a high of just over $1,500 per acre, as measured in constant 2005 dollars (Figure 1).

Rising farmland values were also accompanied and fueled by increasing real estate debt levels. In fact, during the land value run up of the 1970s, the correlation between inflation adjusted farm real estate debt and real farmland values was near 1 (Figure 1). During this time period, the annual percent changes in real estate debt levels were on average more than 13 percent, the steepest rise on record (USDA). Furthermore, lenders relied on anticipated growth of collateral values to compensate for a drop in income and repayment rates (Harl, 1990). This collateral based lending helped fuel the surge in farmland values. As a result, by 1980, the farm sector’s inflation adjusted real estate debt had swelled to a record high of $180 billion.