Feds, farmers view high land prices with caution | The Wichita Eagle

The price of farmland is way up these days, high enough to draw the attention of federal banking regulators on the lookout for real estate bubbles. Are prices building toward a 1980s-style John Mellencamp "Rain on the Scarecrow" farm crisis?

The answer, say experts, is no — at least in the short term.

Most of the conditions that contributed to the farm bubble of the '70s and farm crisis in '80s just aren't present, they said.

Even so, the rise in farm prices is raising eyebrows.

In Kansas, irrigated and nonirrigated cropland has risen 12 percent in the past year, according to a quarterly survey by the Kansas City Federal Reserve Bank.

Ranch land is up about 5 percent.

Jeff Lange, of Jeff Lange Real Estate, is offering 240 acres of good nonirrigated farm ground in the southwest part of Sedgwick County at $1,700 an acre. A year ago, he said, he would have offered it at $1,550 an acre.

Several real estate agents who specialize in farm sales said the price growth is for cropland only. The once red-hot market for hunting/fishing property has cooled with the economy, while the market for development ground has virtually disappeared.

The auction of the 236-acre Ewertz farmstead in Maize in August garnered not a single bid from a developer, Lange said. Instead, the Maize school district bought it.

Sheila Bair, chairman of the FDIC, mentioned her concern about the rise in agriculture land prices in a recent interview with The Eagle.

Her main worry is that speculators desperate for higher returns are artificially inflating demand for farm ground, inflating a bubble.

"The good news there," she said, "is that ag loans are generally conservatively made. They have very low loan-to-value ratios. Unlike the situation we had with the housing market, there's a lot of equity with borrowers in the ag land. But we're watching that carefully."

What's driving it

The main factor driving the price increase has been the rising price of crops. The cash price for wheat is running from $6 to $6.50 a bushel, down slightly from earlier this fall but still 50 percent higher than six months ago.

As crop prices rise, the income derived from the land is likely to rise, which makes the land more valuable.

The crop price increases have been driven in the short term by poor harvests elsewhere in the world, particularly the spring wheat harvest in Russia. But they've also been driven by speculators searching for strong returns.

These investors and speculators are frustrated with the incredibly low interest rates that have lowered bond yields. And the slow economy has eliminated many other classes of investments, such as commercial real estate.

They typically are interested in investing in the land to rent, say the experts, and are less interested in flipping the ground. They are seeking returns of at least 5 or 6 percent, said Brian Briggeman, an economist and author of the Fed report.

But, Briggeman said, outside investors are only a secondary driver pushing up prices. The primary buyers of farm ground remain neighboring farmers.

"They are flush with cash, and are looking for ways to put all that cash to work," he said.

Yesterday and today

What made the '70s bubble happen was several years of strong demand for crops caused by lower trade barriers and exports to Russia. That led to high prices, which in turn led farmers to borrow heavily to buy land and equipment to take advantage of the high prices. Loans were made at the very high interest rates of the times.

But one of the truisms of farming is that the cure for high prices is high prices. High prices led to record harvests, which drove down crop prices and pulled down the artificially inflated land values by 60 percent.

Overleveraged farmers, stuck with loans they could no longer afford, lost their farms.

How is today different from the '70s and '80s?

* Low debt levels. Farmers have been shedding debt during the 2000s, said Byron Enix, senior vice president at American AgCredit, the region's largest agricultural lender. Farmers have the ability to take on more debt without straining, if they choose.

* Low interest rates. If farmers do take on more debt, it will consume less of their income.

* Business knowledge. Enix said farmers today are more sophisticated. "We had a tremendous number of mom-and-pop operations in the '70s," Enix said. "Today, we think of them as businesses."

Several experts said they believe that farmers and farm bankers have memories of the '80s and are acting more conservatively.

Still, it's early, experts caution. Bankers have been known to lose their discipline and loosen their standards when a market gets hot. At the moment, the amount of money available to lend greatly exceeds the demand by farmers, according to the Fed survey.

That's why Bair said the situation needs to be monitored long term. As long as alternative investments such as bonds are delivering poor returns, there is a potential for trouble in the farm belt.

But, so far, the rise in crop and land prices has been nothing but good news for farmers, said Terry Rupp, an agent with J.P. Weigand.

Farmers have more cash to spend on land and equipment. They can borrow more and at lower interest than ever. And, if they want to sell out, they can get more for their land.

"Kansas isn't in a recession," Rupp said. "Wichita is in a recession. Kansas is in a boom."