We are currently in the middle of a very bullish farmland market. Land sales in many areas across the Midwest are breaking records with each new auction. The question is – What can slow down this ride that we are on? There are many factors at play, but one key component is interest rates for farm loans and overall credit in the farm industry. A recent Reuters article (U.S. Farmland Boom May Carry Long-Term Risk: FDIC) takes a look at ag lending practices and how changes may affect farming operations and the land market.
One important point the article mentions is that the FDIC does not see a problem at the current time with lending in agriculture. One reason for this is that ag lenders and borrowers have long memories and have not forgotten the market crash in the early 1980’s, which was partly caused by many bad loans being given to borrowers with not enough equity to support the loans they received. Low interest rates are definitely a major factor in helping fuel the market we are currently in. That being said, most buyers that we have worked with are laying out significant amounts of cash as part of farm purchases. While loans are still involved in most cases, buyers are avoiding putting themselves into highly leveraged situations that many farm owners found themselves in the late 1970’s and early 1980’s.
The article also offers up that lending institutions are doing their homework before handing out a loan. They are requiring more money down and keeping repayment schedules strict to attempt to minimize bad loans. The article also states that lenders have become more comfortable with simply turning down business that they feel would put their company in a bad position.
While it is possible to find support to both sides of the argument of if the farmland market is a bubble ready to burst, I think that the continued practicing of conservative lending practices, coupled with the sensibility of buyers to not over extend themselves, will help keep the farmland market strong.