Could prices of farmland be the next big bubble?
Farmland values are not only up in Saskatchewan, they have risen significantly all over the world in recent years. I came across this article tonight and found it interesting.
Could prices of farmland be the next big bubble? (Posted: October 8, 2011 - 3:41pm Bloomberg News)
The article states "Farmland prices in Nebraska rose 30 percent in the second quarter from a year earlier, according to a survey by the Kansas City Fed, driven by soaring farm income from elevated agriculture commodity prices and record-low interest rates." Wow...that is an impressive increase.
What I found interesting is the comment "When regulators come knocking at the Bank of Newman Grove, Neb., inquiring about loan risks, Chairman Jeffrey Gerhart has a “stress test” ready to show how his portfolio would fare if rural land prices dropped 25 percent. Or 50 percent. Or 75 percent...it goes on to say...Gerhart’s tests show that if land prices dropped 25 percent or 50 percent his bank’s loans should not be negatively affected. A 75 percent drop would “have an impact,”
I worked for Farm Credit Canada (FCC) in the early 1990s when it was recoverning on nearly 800 million dollars in defaulted agricultural loans. Loans were made with little to no security margins and when land values softened, loans were undersecured almost instantly. I don't think we are at or even close to that level of instability. This particular banker states that their loan to security margins are at a healthy level and could weather values (and security margins) dropping in half. I believe that at the moment agricultural loan portfolios are currently quite healthy and that is going to continue to fuel farmland value increases.