Sales of everything from compact tractors to combines have jumped at Jim Lichtenberg's Nebraska store this year as farmers try to make the most of a boom in corn and soybean prices.
"Yields were good this year and crop prices are real good right now, so guys have been spending some money," said Mr. Lichtenberg, who has worked as a salesman for Johnson Farm Equipment in Fremont for 10 years. He estimates sales have risen by as much as 40 per cent this year.
Surging grain prices and growing investor interest are lifting farmland prices in the Midwest, and bank regulators fear that another U.S. bubble may be inflating.
Farmland prices are 58 per cent above their 2000 levels in inflation-adjusted terms, according to the Federal Deposit Insurance Corp. That's about how much residential real estate prices rose in the United States from 2000 through 2004.
Those soaring land values reflect the largely unsung prosperity of U.S. states that shrugged off the downturn.
That's good news, but many analysts wonder what would happen to the lenders who finance farmland operations and purchases if prices fall.
"If commodity prices plunge from the current levels and you think they're in a bubble, which I tend to think they are, there is risk" for agricultural banks, said Rochdale Securities analyst Richard Bove.
Grain prices are rising because of demand for grain-fed meat from emerging middle classes in India and China, and crop production problems globally, including a drought in Russia.
Investors like farmland because they see it as a safe asset that generates income. They also benefit from the Federal Reserve's low interest rates, which are prompting investors to seek high yields in commodities.
These factors may not last, Mr. Bove said.
The Federal Deposit Insurance Corp is monitoring credit to U.S. farmland, said Sheila Bair, chairman of the Federal Deposit Insurance Corp, last month in Baltimore, The loan market does not seem frothy now, but there is still risk there, Ms. Bair said.
"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," Ms. Bair said in October.
The $245-billion farm loan market is small compared to the $11.5-trillion U.S. home loan market and the nation's $2-trillion of farmland assets.
But a downturn in rural land values could hit Midwestern states hard, and some smaller banks could end up hobbled. As the U.S. government deals with a financial crisis that has already ruined more than 300 banks, a farmland bubble could add to the taxpayer's cleanup bill.
'Gold With a Cash Flow'
As land prices rise, bank exposure grows. In 2004, banks had about $95.7-billion of farm mortgages. In the middle of 2010, that figure was closer to $132-billion.
"Every bank is working hard to find credit-worthy customers. When you see a sector like agriculture that's doing well, suddenly they like to swing towards it, whether they have the expertise and understanding to deal with it or not," said Wells Fargo agricultural economist Michael Swanson.
Wells, which made about $9.4-billion in agricultural loans in 2009, is the nation's top farm lender. But such loans count for a small fraction of Wells Fargo's $1.22-trillion of assets, while hundreds of small regional banks rely on agricultural lending for over half their business.
Farm lending is especially popular in Midwestern states like South Dakota, Minnesota and Nebraska. For example, farm and farmland loans make up 94 per cent of the loan book at the $30-million-asset State Bank of Bellingham, Minnesota.
Agricultural lending is a much smaller, but still important, business at larger, publicly traded companies, including Iowa's MidWestOne Financial Group Inc, Arkansas's Bank of the Ozarks, BNP Paribas's Bank of the West and Wisconsin's Marshall & Ilsley Corp.
Farmland also draws investors, who have funneled billions of dollars into it in recent years.
"In the age of derivatives and evaporating valuations, farmland is gold with a cash flow," said Hancock Agricultural Investment Group President Jeffrey Conrad earlier this year. Mr. Conrad calculates that his group picked up more than 30 new farm properties last year for investors.
In an interview on Monday, Mr. Conrad dismissed talk of a bubble, saying that debt levels have been falling and are relatively low.
"These are signs you don't see before bubble," he said.
The question is, is it sustainable? Or is it more speculative in terms of people chasing the values? Michael Collins, Federal Reserve Bank of Philadelphia
For over a year, some Midwestern state regulators have been eyeing potential weaknesses, and national bank regulators are starting to join them.
Prices and yields of crops in South Dakota have been "extremely strong" in the absence of drought and large-scale flooding, said Tim Ahartz, deputy director at the South Dakota Department of Banking.
For the past year, Mr. Ahartz has asked banks to be more specific about what types of agricultural loans are on their books, to ensure that lenders better understand the risks of those portfolios.
Nationwide, crop prices have been high. Corn futures have risen about 40 per cent this year and soybean futures are up 18.1 per cent.
"Our fear is if drought, for example, were to reoccur, or if input costs of farming continue to rise and the yields of the crop can't keep up, where is the cash flow going to come from?" Mr. Ahartz said.
It has happened before in the United States.
One of the worst droughts in U.S. history hit in the 1930s, contributing to rural bank closures and unemployment and making the Great Depression even worse.
Economic factors may cut into crop prices too. In the 1980s, high interest rates and a recession cut world demand for agricultural commodities. Grain prices fell and farmland values dropped 5.2 per cent annually from 1980 to 1987.
Michael Collins, lending officer at the Federal Reserve Bank of Philadelphia, recently cited agricultural lending when asked about potential risks for banks.
"The question is, is it sustainable? Or is it more speculative in terms of people chasing the values? So we are looking into it," he said.
Mr. Collins said that banks in the Midwest are most at risk, but it could also be a problem in his district, which includes Delaware and central Pennsylvania.
U.S. regulators, who must try to spot potential bubbles, in the past have said that it is extremely difficult to tell whether a rapid rise in asset prices comes because of speculative fervour or a fundamental change in valuations.
South Dakota's Mr. Ahartz said it is possible that the farm lending boom is being powered by "a paradigm shift in the need for food globally."
"In that case, how high does the value go? Right now, the increased expense side of farming is being taken care of by what's occurring on the commodity side. I don't know if that is ever going to end," he said.