Bloomberg News

Farmers Bet on Rates as MetLife Battles Rural Lenders: Mortgages

February 01, 2012

Jan. 20 (Bloomberg) -- John Harder, a 65-year-old farmer with 7,500 acres in Iowa, said he’s taking out new loans almost every month as profits surge and land prices reach records.

“If I can get the rate right and buy the property right, I’d borrow millions every day,” said Harder, who is expanding his corn and soybean plots with a 3.35 percent, variable-rate loan from a U.S. Farm Credit System bank. “I’m kind of a gambler anyway or else I wouldn’t be doing what I’m doing.”

Farmers are taking advantage of a resurgence in government- chartered credit providers and Federal Reserve efforts to stoke the economy by holding the fed funds rate near zero. Competition from private lenders such as MetLife Inc. and Wells Fargo & Co. is keeping borrowing costs near record lows as the value of farmland in the third quarter rose as much as 25 percent in the U.S. Midwest, driven by surging sales of corn to ethanol producers and grain exports.

“We’re seeing very aggressive activity by the Farm Credit System and commercial banks,” Jason Henderson, vice president and Omaha, Nebraska branch executive at the Federal Reserve Bank of Kansas City, said in a telephone interview. “Everyone is battling for market share.”

The Farm Credit System, created by Congress in 1916, increased its share of lending in the $136 billion farm real- estate market to 45 percent from 41.5 percent in 2007 and 35 percent in 2000, according to U.S. Department of Agriculture data. The network, made up of banks and 83 associations owned by farmers and funded by bond sales, won the business of those like Harder by cutting rates and paying dividends to borrowers.

Top Credit Grades

It raises money for lending by issuing Federal Farm Credit Banks Funding Corp. debt that according to Fitch Ratings has the “implicit support” of the U.S. government. The bonds carry the top credit grades from Moody’s Investors Service and Fitch, and are ranked at AA+ by Standard & Poor’s, the same as the U.S. government. They’re separate from Farmer Mac, a government- supported enterprise that provides a secondary market for mortgages created by commercial banks and other lenders.

“In agricultural banking, we have our very own rogue elephant,” said John Blanchfield, who directs the ABA Center for Agricultural and Rural Banking at the American Bankers Association in Washington. “It’s the federal farm system.”

The average value of an acre of U.S. farmland reached a record $2,350 in 2011, the Department of Agriculture said in August, climbing from $737 in 1980. Land prices at an average of $5,600 an acre in Iowa are more than triple what they were a decade ago. Jason O’Connor, 34, is spending $8,500 an acre on a corn and soybean farm near Herscher, Illinois.

‘Kind of Scary’

“It’s kind of scary,” said O’Connor, who turned to AgFirst Farm Credit Bank of the Farm Credit System for a 5.9 percent loan and expects to close on the 80 acre (32 hectare) plot next month. “We’re at a record high, and we’re all afraid the balloon is going to burst.”

The land rally was cited in March 2011 by Sheila Bair as a potential risk for farm banks. Bair, then chairman of the Federal Deposit Insurance Corp., said the “steep rise” in farmland could cause instability in the system.

Investors ranging from Singapore-based hedge-fund managers Jim Rogers, chairman of Rogers Holdings, and Stephen Diggle of Vulpes Investment Management to Harvard University’s endowment are betting on farmland as food prices rise. Perry Vieth, a former fixed-income trader for PanAgora Asset Management Inc., founded Ceres Partners LLC in December 2007 to buy and oversee farms. Investors in his Granger, Indiana-based firm receive a share of farmland, while Ceres leases land to local farmers.

‘Eager to Buy Ground’

“I was just talking to about 200 farmers in Southern Minnesota and they’re still very, very eager to buy ground at the current prices, even though they’re record prices,” said Michael Swanson, an agricultural economist and consultant for Wells Fargo. “Structurally we’re very enthused about the market.”

While some agricultural companies have used the rally in land values to add to long-term borrowing, farmers are using increased earnings to repay debt. The result, according to USDA estimates, is a contraction in the market.

“The challenge is to find, or even maintain the loan volumes that they’ve had in the past,” said Cole Gustafson, a professor with North Dakota State University. “The existing lenders have been very competitive, so loan margins have been driven very low.”

Poaching Market Share

Outstanding loans backed by agricultural real estate were poised to fall 3 percent to $132.1 billion in 2011, the USDA forecast in November. To counter, lenders are seeking to grab clients from competitors.

MetLife teamed with Wells Fargo and Bank of America Corp. to poach farmer-owned Aurora Cooperative from Farm Credit’s Cobank.

The New York-based insurer, which had about $13 billion in agricultural investments as of Sept. 30, offered Aurora a lower interest rate and provided a real-estate appraisal that more than doubled the value of its collateral. That allowed Aurora, based in the Nebraska city of the same name, to boost long-term debt to $90 million from $40 million and cut the seasonal short- term borrowings it uses to fund inventory purchases.

“These assets have really exploded in valuation over the last 5 to 10 years,” Aurora Chief Executive Officer George Hohwieler said in an interview. “The amount of leverage against those assets was very small” under the previous deal with Cobank, he said.

Interest Rates

MetLife and Lincoln, Nebraska-based Union Bank & Trust Co. provided Aurora’s long-term, property-backed debt. San Francisco-based Wells Fargo and Bank of America led the short- term financing, which is collateralized by inventory such as fertilizer, seed and grain, Hohwieler said. Arthur Hodges, a spokesman for Cobank, declined to comment.

Agriculture real estate loan interest rates fell to the lowest since at least 1974 at 5.36 percent in the third quarter for the region that includes Illinois, Indiana, Iowa, Michigan and Wisconsin, according to the Chicago Federal Reserve Bank. Iowa, the largest corn producing U.S. state, had the lowest rate in the region at 5.24 percent.

“It’s crazy not to use the money because the cash is so cheap right now,” said Bill Couser, a 57-year-old farmer who expects to close in March on a 10-year loan from State Bank & Trust Co. Couser is using the loan to finance a $1 million land purchase to expand his ownership of a corn-seed and cattle farm.

DuPont, FMC Beneficiaries

Lenders in the Farm Credit System are generally offering variable rate loans at about 3.5 percent and fixed-rate loans at 5.5 percent, according to Doug Stark, CEO of Farm Credit Services of America, an Omaha-based lender that is part of the Farm Credit System. Landowners aren’t the only ones gaining.

“Ag-related names have benefited with farm incomes rising,” said Jeff Windau, a St. Louis-based analyst for Edward Jones & Co., who has “buy” ratings on DuPont Co., the largest U.S. chemicals company by market value and FMC Corp. “Farmers have more money to invest in machinery, and with higher commodity prices they’re able to go for the higher-value seeds.”

The Farm Credit System required a bailout of as much as $4 billion of taxpayer-backed bonds in 1987 as land prices slumped after rising in the 1970s. The network weathered the 2008 credit seizure as Fannie Mae and Freddie Mac, the residential mortgage finance companies, had to be rescued by the U.S. Government, costing taxpayers more than $153 billion.

Credit Perspective

“We had our challenges in the 1980’s,” Stark said in a telephone interview. “We learned some valuable lessons from those times.” Net income at Farm Credit System rose to $2.99 billion for the first nine months of 2011 from $2.63 billion for the year-earlier period.

From a credit perspective, “investors love the Federal Farm Credit bonds,” said Ralph Axel, a Bank of America analyst in New York. “They didn’t need a bailout, they have no big investments in private label securities and they’re not suffering from credit losses on their loans.”

He recommended this month that agency debt investors favor the bonds of the Federal Farm Credit Banks and Federal Home Loan Banks over Fannie Mae and Freddie Mac after the government tapped the two mortgage companies to pay for last month’s extension of a payroll tax cut.

The Federal Farm Credit Banks’ $481 million of 0.54 percent bonds due in October 2014 trade at 100 cents on the dollar to pay 18 basis points more than similar-maturity U.S. Treasuries, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Tremendous Equity

“There’s a tremendous amount of equity in agriculture,” said Calum Turvey, a professor of agricultural finance at Cornell University. “This is why the bonds issued by the Farm Credit System are trading just a couple of basis points above Treasuries.”

MetLife expects to expand in agriculture, which accounts for about 3 percent of its $493 billion portfolio, with growth outside the U.S., Chief Investment Officer Steven Goulart told investors in December. The company reported a 2.9 percent gain in agricultural investments in the 12 months ended in September, while holdings of residential mortgage-backed securities fell 8.7 percent in the same period.

“We continue to see ag lending as a good opportunity for us,” Robert Merck, senior managing director of real estate and agricultural investments at MetLife, said in a telephone interview. “It has performed well.”

--With assistance from Alan Bjerga in Washington and Seth Lubove in Los Angeles. Editors: Pierre Paulden, Rob Urban

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net; Brian Louis in Chicago at blouis1@bloomberg.net; Christine Harvey in New York at charvey32@bloomberg.net.

To contact the editors responsible for this story: Rob Urban at robprag@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net;


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