Pensions Pile Into Pricey Farmland; The Fed Is Worried

Regulators don't want a repeat of the subprime crisis

BusinessWeek reports that when regulators come inquiring about loan risks at the Bank of Newman Grove, in Newman Grove, Neb., Jeffrey L. Gerhart, the chairman of the $35 million lender, has a “stress test” ready to show how his bank’s portfolio would fare if rural land prices dropped 25 percent. Or 50 percent. Or even 75 percent.

Farmland prices were 30 percent higher in Nebraska in the second quarter than a year ago, according to a survey by the Kansas City Federal Reserve Bank, driven by elevated crop prices, soaring farm income, and record-low interest rates. That’s the high end of increases in cropland valuations of 8 percent and more in the region stretching from Oklahoma to North Dakota and from Nebraska to Michigan. Last March these increases prompted Yale University economist Robert J. Shiller to call farmland his “dark-horse bubble candidate for the next decade.”

Shiller’s warning has the Federal Reserve on guard, based on interviews with Fed regulators, economists, and policymakers. His prediction of a housing bubble in a 2005 edition of his book Irrational Exuberance proved prescient. Regulators missed the risks in residential and commercial real estate that led to the subprime crisis. So examiners at regional Federal Reserve banks and the Federal Deposit Insurance Corp…

Find out more at http://www.businessweek.com/printer/magazine/farmland-is-pricey-the-fed-is-worried-10132011.html