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Corn price fall spurs talk of ’80s ag woes

By Kathleen M. Howley

Bloomberg News

Din Tai Fung, a restaurant in Shanghai’s Xintiandi district, is famous for its steamed pork dumplings. The pigs that keep those dumplings on the table are fattened with corn — much of it imported from the United States.

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American farmers have prospered during a three-year boom in corn and cropland prices. As values have soared since 2011, farmers bought more acres and upgraded their harvesters to produce a record corn crop of almost 14 billion bushels in 2013.

Nothing better shows the fertile times than investment in farm equipment. Sales of self-propelled combines, including an $850,000 John Deere model with iPod system, navigational equipment and heated seats and an attachment that harvests the corn, jumped 40 percent in November.

Now, as corn prices start to decline, bankers and agricultural economists are predicting a slowdown in farmland prices that could turn into a bust.

“I can see the fear in farmers’ eyes when they think of all the moving pieces around the world gutting the value of next year’s crop,” said David Kohl, an agricultural economist and president of consulting firm AgriVisions, who last week spoke at several farming conferences in northern Nebraska. “Most of them know the boom in corn prices and farmland prices is coming to a screeching halt.”

U.S. farmers, whose earnings grew an average 6 percent in 2013, face several challenges: a likely reduction in corn exports to China after a record year; greater competition from other nations; moves in the U.S. and the European Union to limit the use of ethanol, a biofuel made from corn; and a possible record in production of the crop in 2014.

Kohl said a plunge in land prices would strip value from farms and put over-leveraged farmers out of business. Farmland prices are up 72 percent to about $8,000 an acre in the last three years, according to data from the U.S. Department of Agriculture. In Iowa, the largest producer of corn, the gain was 90 percent, according to the Iowa State University in Ames.

The value of the nation’s $2.5 trillion of farmland may tumble by as much as 30 percent in the next three years as the corn rush ends, according to Gary Ash, chief executive officer for 1st Farm Credit Services in Normal, Ill.

“The increase in land prices was caused by the increase in corn prices,” Ash said. “The reverse is going to be true. The drop in corn is going to result in a drop in land value.”

In the 1980s — the last time an agricultural landprice bubble burst — thousands of families lost their properties. Farmers who bought additional land when prices were surging were caught with too much debt as commodity prices fell.

Farmland prices tumbled 27 percent in the four years following a 1982 peak, according to USDA data. In some areas of the Midwest’s grain belt, losses were more than 50 percent.

Stephen Riebel, a loan officer at Bank of Colby in Colby, Kansas, said he still has nightmares about those days. As a young banker, he visited deeply indebted farmers who were his friends and neighbors to hand them eviction notices after a collapse in corn prices.

“All it takes is for everyone in the world to have a good crop next year and land prices will drop like a rock,” Riebel said from his office in northwest Kansas. “I’ve seen the heartache that leads to.”

Bankers have learned their lesson, said Timothy Buzby, CEO of agricultural financier Farmer Mac in Washington. Most banks won’t give mortgages to properties that don’t have at least 30 percent equity — the amount needed to protect them if there is a decline in land values, he said. “If there is a correction in land prices, farmers would hear a resounding ‘I told you so’ from most bankers,” said Buzby. “We haven’t seen many people go out on a limb to finance unwise land purchases.”

Farmer Mac sells debt to buy eligible farm and rural utility loans and makes money on the spread between the sale price of the debt and income from loans it purchases. Farm debt rose 10 percent to $310.2 billion this year, according to the USDA.

Some farmers expect a soft landing. Martin Barbre, who owns a 5,500-acre farm in Carmi, Ill., has been growing crops for more than three decades. Corn accounts for about 50 percent of his production. He bought about 250 acres of land in the last three years and said prices will likely plateau.

“I think we’re going to see corn prices stabilize, and we’ll have either level land prices or a slight drop,” Barbre said.