I was talking with a local banker yesterday who has been through several up and down cycles in farm lending and ag land. My question to him was, “Do you think this is a bubble? Are prices going to crash at some point?” That seems to be the question of the hour in the news media. Housing prices continue to fall while farm land prices are rising faster than anyone can believe. Of course, he didn’t know the answer.
Our area is awash with stories of recent rent and land auctions where the land rents or sells outright for prices previously unheard of in this area. MPR reports that farm land is selling at prices that may make it difficult for farmers to turn a profit, even with record prices for corn and soybeans in recent years. I spoke with a local farmer recently, and asked him if he was in the market for more land. Even though he has potentially 15-20 years of farming in his future, he replied, “I’m not sure I’ll be farming long enough to pay back a loan at today’s land prices.”
The banker I spoke with described conditions in farming during the 70s and 80s that led to a historic farm crisis. When banks called in their loans at that time, attorneys assisted farmers with negotiating principle reduction plans or farmland swaps (give us X amount of land and we’ll leave the rest of your farm alone). We have seen today’s bankers involved in the current housing crisis extremely reluctant to participate in any sort of principle reduction. How likely would ag lenders be willing to do the same on today’s large loans if the market dropped? Recounting yearly crop yields and weather conditions, the banker went on to tell me that rising yields and prices, combined with nearly 20 years without a total crop failure in Southeastern Minnesota, have left many local farmers in good shape.
Farming has a lot of variables, many of which cannot be controlled in any reasonable way (weather?). Let’s hope those factors continue to be favorable to strong profits, so farms can keep up with rising land prices.