by Agrimoney.com
Farmland values could "plummet" in the US – potentially by one-half – if the market supports of low interest rates and high crop prices crumble, the US central bank has warned, heightening concerns over the market boom.
Record farmland prices, which in the Midwest increased at their fastest in 32-years in the first three months of 2011, appears rational as long as borrowing costs remain low, reducing investors' hurdle rates for returns, while elevated crop values keep actual profits high.
"Current farmland values reflect high farm revenues and low capitalisation rates," the US Federal Reserve system's Kansas bank said.
However, they "could fall sharply if crop prices sag or future interest rates rise", the bank added, warning of a "high risk" from interest rate moves.
'Values could plummet'
Indeed, higher interest rates are, besides making investors more demanding of returns from their purchases, likely to present the farmland market with a second blow of a stronger dollar which, in making US exports such as crops less competitive, would undermine agricultural commodity values.
"As the economy strengthens, interest rates could rise, which may lift capitalisation rates and lower farm revenues," the bank said in a report.
"Events such as these could become a recipe for falling land values and the erosion of farm wealth."
Indeed, the market could fare worse than in the early 1980s, when a jump in interest rates, coupled with lower US farm exports and weaker commodity prices, fuelled at 40% slide in US farmland values – even after taking inflation into account.
"If similar events occur in today's environment, farmland values could plummet," the briefing said, with this scenario implying as halving in Nebraska prices.
"Other regions face similar risks."
Market bubble?
Thomas Hoenig, the president of the Fed's Kansas City bank, has been for some while a sceptic of the rise in farmland prices, warning in February that ''history has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets".
Other observers who have voiced concerns include Robert Shiller, the Yale economist who warned in March that the farmland was a "dark horse" as the site of the next market bubble, while regulators at the Federal Deposit Insurance Corp have highlighted the sector's resilience at a time of weakness elsewhere in the economy.
"While we don't see a credit problem in agriculture at this time, the steep rise in farmland prices we have seen in recent years creates the potential for agriculture credit problems sometime down the road," Sheila Bair, FSIC chairman, said, also in March.
Alternative views
However, many other bankers are more sanguine about the market, with two-thirds of those surveyed by the Fed's Kansas City bank for a report two weeks ago believing prices would level off, rather than tumble, following growth of 20% in the first quarter.
A report from the system's Chicago bank last week showed more than half bankers expecting the market price growth to continue, while adding that farmers' borrowing, compared with deposits, remained comfortably below level triggering alarm bells.
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