The sharp run-up in U.S. farm real estate values in recent years could cause credit problems for agricultural lenders should prices reverse quickly, according to new research released by Fitch Ratings.
‘Land price increases in the Corn Belt and Northern Plains have been far higher than the national average, with estimates of 17 percent and 26 percent, respectively,’ says Fitch Ratings. ‘This comes on the heels of similar price increases in the 2010-2011 period. Cumulative increases since 2000 in the Corn Belt and Northern Plains regions have been 188 percent and 225 percent, respectively. Some subsegments of these regions containing prime cropland have seen increases far in excess of regional averages.’
Fitch Ratings cited a U.S. Department of Agriculture report that found farm real estate values nationwide increased by an average of 10.8% year-over-year, to $2,650 per acre as of June. The surge in farmland values over the last decade was attributed to low interest rates, high commodity prices and a tight supply of available for-sale farmland. However, Fitch Ratings states that a reversal of fortunes could prove deleterious for this sector.
‘In the event that the long-term trends of low interest rates and rising commodity prices reverse themselves relatively quickly (a scenario not considered unreasonable), we would expect a large correction in farmland values,’ Fitch Ratings warns. ‘Lenders with significant exposure to the agricultural industry in general, and those with substantial amounts of farmland serving both as collateral and as the primary repayment source, would likely report large credit losses in such a scenario.’