NEW YORK – John Harder, a 65-year-old farmer with 7,500 acres in Iowa, said he’s taking out new loans almost every month as profits surge and land prices reach records.
“If I can get the rate right and buy the property right, I’d borrow millions every day,” said Harder, who is expanding his corn and soybean plots with a 3.35 percent, variable-rate loan from a U.S. Farm Credit System bank. “I’m kind of a gambler anyway, or else I wouldn’t be doing what I’m doing.”
Farmers are taking advantage of a resurgence in government-chartered credit providers and Federal Reserve efforts to stoke the economy by holding interest rates near zero.
Competition from private lenders such as MetLife and Wells Fargo is keeping borrowing costs near record lows, and the value of farmland in the third quarter rose as much as 25 percent in the Midwest, driven by surging sales of corn to ethanol producers and grain exports.
“We’re seeing very aggressive activity by the Farm Credit System and commercial banks,” said Jason Henderson, vice president and Omaha, Neb., branch executive at the Federal Reserve Bank of Kansas City. “Everyone is battling for market share.”
The Farm Credit System, created by Congress in 1916, increased its share of lending in the $136 billion farm real-estate market to 45 percent from 41.5 percent in 2007 and 35 percent in 2000, according to U.S. Department of Agriculture data.
The network, made up of banks and 83 associations owned by farmers and funded by bond sales, won the business of those such as Harder by cutting rates and paying dividends to borrowers.
It raises money for lending by issuing Federal Farm Credit Banks Funding Corp. bonds that carry the top credit grades from Moody’s Investors Service and Fitch Ratings and are ranked at AA+ by Standard & Poor’s, the same as the U.S. government.
They’re separate from Farmer Mac, a government-supported enterprise that provides a secondary market for mortgages created by commercial banks and other lenders.
“In agricultural banking, we have our very own rogue elephant,” said John Blanchfield, who directs the ABA Center for Agricultural and Rural Banking at the American Bankers Association in Washington. “It’s the federal farm system.”
The average value of an acre of U.S. farmland reached a record $2,350 in 2011, the USDA said in August, climbing from $737 in 1980. Land prices at an average of $5,600 an acre in Iowa are more than triple what they were a decade ago.
Jason O’Connor, 34, is spending $8,500 an acre on a corn and soybean farm near Herscher, Ill.
“It’s kind of scary,” said O’Connor, who turned to AgFirst Farm Credit Bank of the Farm Credit System for a 5.9 percent loan and expects to close on the 80-acre plot next month. “We’re at a record high, and we’re all afraid the balloon is going to burst.”
The land rally was cited in March 2011 by Sheila Bair as a potential risk for farm banks. Bair, then chairman of the Federal Deposit Insurance Corp., said the “steep rise” in farmland could cause instability in the system.
Perry Vieth, a former fixed-income trader for PanAgora Asset Management Inc., founded Ceres Partners in December 2007 to buy and oversee farms. Investors in his Granger, Ind.-based firm receive a share of farmland, while Ceres leases land to local farmers.
“I was just talking to about 200 farmers in southern Minnesota, and they’re still very, very eager to buy ground at the current prices, even though they’re record prices,” said Michael Swanson, an agricultural economist and consultant for Wells Fargo.
While some agricultural companies have used the rally in land values to borrow more, farmers are using increased earnings to repay debt. The result is a contraction in the market.
“The challenge is to find, or even maintain, the loan volumes that they’ve had in the past,” said Cole Gustafson, a professor with North Dakota State University. “The existing lenders have been very competitive, so loan margins have been driven very low.”
