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.
Rising farmland values and debt levels over the last decade raise the question whether agriculture is heading for another 1980s type farm debt crisis. While trying to predict a “black swan” event like a debt crisis is nearly impossible, the agricultural sector appears to be well positioned to handle a potential downturn in farmland markets. According to the USDA, rising global demand and tight supplies are expected to boost 2011 net farm income 20 percent. With farm income expected to rise, agricultural lenders’ profitability will also likely rise. In addition, lenders appear to be well capitalized and, according to anecdotal reports, are now cash flow based lenders, not collateral based lenders.
While the outlook for agricultural lenders appears to be bright, they do face significant challenges. The concentration of farm real estate debt among a few borrowers could lead to significant stress in a lender’s farm loan portfolio. The impetus for this stress would likely be a rapid and sustained fall in farm income, which could come from myriad sources. Some of these sources include, domestic and international producers responding to high prices by sharply increasing agricultural production which could push prices down, falling global demand for products, commodity price volatility, a rise in U.S. exchange rates, changes in U.S. farm and energy policy, and global unrest from soaring food prices and inflation.
Managing these risks will be key to the future success of agricultural lenders and producers. A lesson of the 1980s was that low amounts of liquidity and capital can amplify the negative effects of a drop in farmland values. Managing future stress stemming from a farmland value drop may well depend on lenders and producers holding ample liquidity reserves and keeping debt levels low.
For More Information
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