Farmer Mac acts as a secondary market for agricultural loans to support American agriculture and rural communities. Curt Covington, Farmer Mac’s senior vice president for agricultural finance, offers Agri Investor his thoughts on farmland values, alternative lenders and how the specter of the 1980s impacts the current leverage environment.
Do you expect farmland values to fall over the coming year?
It depends on what part of the country you are in. If you are in “flyover country” in the Midwest, we’ve already seen some declines driven by lower commodity prices, primarily in grains. Other areas of the country have experienced a rise in land values. On the west coast – across the board – average land values have gone up, slightly, and the same can be said for parts of the Southwest.
Even in the Midwest, you are seeing large variations in the declines. Clearly, high-quality land is still selling at a premium to low-quality land, so productivity really is a driver of what land values are. You can look at one part of Iowa and see parcels that have seen a 20 percent decline in value, but not a whole lot further away you see only slight declines.
Ryan Sullivan of Aberdeen Asset Management recently told Agri Investor he believes a group of younger farmers are more comfortable taking on debt and could expand the opportunity for PE firms providing it. How do you think these young farmers will react to declining land values?
Young farmers that are coming out of school clearly understand from a textbook definition that leverage is not necessarily a bad thing, but they have never been through tough times; during the last farm crisis in the early 1980s, a lot of these young producers were a just twinkle in their mother’s eye. Of course they’re more comfortable with leverage; over the past 10 years they have seen mostly good times and they’ve always been able to pay their debts as agreed.
Land is bought during good times but has to be paid back during tough times. Leverage kills. If you rise above 50 percent debt-to-asset ratio, the lender is now a significant partner in the business. A 50 percent debt-to-asset ratio can easily shoot to a 70 percent debt-to-asset ratio if some of these commodities continue to struggle and land prices continue to fall. Then all of a sudden you find that what looks good in a textbook doesn’t always work out on the farm.
Do you think comparisons between the current state of farmland values and the 1980s are appropriate?
I think we are in for a much softer landing than what we saw in the 1980s because most of the farmers came into this downturn with much stronger balance sheets. Having said that, there will be pockets of problems that will be undeniably familiar.
Back then, we had very, very high interest rates, and farmers were borrowing at a very high interest rate of 18 percent or more. What happened in the 1980s seemed to happen almost overnight; this one seems to be a more gradual settling of land values. Today’s really smart farmers have found ways to keep their leverage in check.
Why do you think you see more alternative lenders lending into agriculture?
One of the root causes of this shift from traditional banks to alternative lenders is that banks have been put under a significant amount of pressure under the current regulatory environment. If a farmer went into a bank 20, 30 years ago, or maybe even 10 years ago, the ability to get financing and the time it took to get financing was totally different than what it is today. Banks today are forced to spend additional time, money and effort in areas that can be revenue-killing for the bank.
Whether you call them non-traditional or alternative, these new lenders see an opportunity and they have gone after it. They have some really good underwriting practices. Many have come out of the traditional banking world and see there is real opportunity in this market. What a lot of borrowers want is a quick yes and a faster no, and with the increased regulations, some banks struggle to meet this expectation.