FDIC's Bair Warns of Potential U.S. Farm Asset Bubble

The financial health of more than 1,500 farm banks could be threatened if the "positive fundamentals" in the currently booming agricultural sector reverses, according to Federal Deposit Insurance Corporation Chairman Sheila Bair.

The financial health of more than 1,500 farm banks could be threatened if the "positive fundamentals" in the currently booming agricultural sector reverses, according to Federal Deposit Insurance Corporation Chairman Sheila Bair.

"While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring," Bair said during recent remarks before the Risk Management Association. She noted that over the past dozen years, the United States has experienced asset price bubbles in the stock market and the housing market, leading her to ask: "Where might asset bubbles be forming today?"

One candidate, Bair said, is U.S. farmland values, which she said remain some 58 percent above their 2000 levels in inflation-adjusted terms. And while strong agricultural conditions have spurred renewed interest in farmland on the part of investors, "today's positive fundamentals are subject to change," said Bair.  

"A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks, [and] while the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring." 

Currently, USDA is forecasting that the farm debt-to-asset ratio (11.2 percent) and debt-to-equity ratio (12.6 percent) signal a very healthy industry. And while there are some pockets of concern — with livestock and dairy the prime examples –– the overall the foundation of the U.S. agriculture sector is solid.  

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