Farmland Prices and Term Debt Coverage: Sources of Uncertainty Facing Agricultural Mortgage Lenders
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While conditions in agricultural credit markets differ sharply from the decade of the 1980s, considerable uncertainty exists. Net farm income in 2014 is projected to be 25 percent lower than a year earlier due, in part, to record production for major crop commodities in both the U.S. and globally projected to overhang markets in 2015. There is also a strong likelihood of rising interest rates and a stronger dollar beginning in 2015 as the Federal Reserve guides financial markets toward a more normal interest rate structure. The possibility of a return to net farm incomes pre-2012 levels, higher interest rates and a softening of farmland values clouds the agriculture finance outlook going forward. We are already seeing a softening of farmland values and rental rates in states like Iowa. While debt ratios are historically low according to USDA published national-level indicators, this statistic is misleading since roughly two-thirds of the nation's farmers are said to have no term debt. Farm debt outstanding today is 60 percent higher than it was during the peak of the farm financial crisis in the mid-1980s and is projected by the USDA to increase another 3 percent this year. This suggests that the remaining one-third of the nation's farmers have expanded their use of debt and are likely susceptible to financial stress under more adverse market conditions..........