What is in this article?:
- Farm real estate debt often plays a key role in farmland purchases. Without access to credit, many farmers and ranchers would find it difficult to buy land, especially with current values at historically high levels. Yet, extending too much debt could undermine the sustainability of lofty farmland values, and ultimately lead to a collapse in land markets.
Pile of debt
When farmland values crashed in the 1980s, the pile of debt created a significant amount of stress for farmers. A global recession and a fight against rampant inflation in the 1980s slashed demand for agricultural products, raised the value of the dollar, and sent agricultural exports and incomes plummeting. As a result, real farmland values dropped more than 40 percent. This drop was fueled by forced land sales by farmers who could no longer afford to service high debt levels at extraordinarily high interest rates. Consequently, numerous farmers filed for bankruptcy. While farm bankruptcy data is unavailable from 1980 to 1986, by the end of 1987, the farmer bankruptcy rate was 23.05 per 10,000 farms, the highest annual bankruptcy rate on record (Stam and Dixon, 2004).
Many agricultural lenders also faced financial stress because rising farm foreclosures cancelled numerous debts secured by real estate. During the 1970s and 1980s, most real estate debt was concentrated among two primary lenders—the Farm Credit System and individuals selling land on contract (Figure 2). According to the USDA, throughout the 1970s, both lenders accounted for two-thirds of total farm sector real estate debt. Life insurance companies, commercial banks and the USDA Farm Service Agency each accounted for about 10 percent of real estate debt. Starting in 1980, the number of bad loans charged off lenders’ loan portfolios skyrocketed as collateral values on foreclosed real estate loans sank. According to call report data, net loan charge offs at agricultural banks rose from a prefarmland boom of about 0.3 percent of total loans to over 2.5 percent in 1985. A comparable number for the Farm Credit System was over 10 percent. As a result, over 300 agricultural banks failed, the Agricultural Credit Act of 1987 provided the Farm Credit System $4 billion of financial assistance, and individuals who sold land under contract also suffered numerous write-offs.