Steve Lindholm, owner, chairman and CEO of Granite Falls Bank, a $207 million-asset ag bank in this southwestern Minnesota town, is the first to admit that he's living in some kind of parallel economic universe.
While much of the rest of the country frets over the prospect of a double-dip recession and further declines in property values, life on the farms surrounding Granite Falls—and the rest of the nation's Corn Belt—has rarely been better. Prices for King Corn, stoked by government biofuel mandates, growing Asian demand for feed grains and a weak dollar, have reached more than $7 per bushel this year, triple the historical average and the highest on record. New technology has improved per-acre yields, allowing farmers to cash in.
Unlike corporate America, they're spending that haul—for new combines, storage buildings, even pick-up trucks. Equipment dealers are struggling to keep big-ticket items in stock, home prices have held steady and business is booming for local contractors. Unemployment is virtually nil.
"This year is going to be a good one, better than last year," Lindholm says. "The income stream for our customers is about as good as we've ever seen it."
Even so, the optimism is tempered by fears that too much of a good thing could come back to hurt farmers—and the bankers they rely on.
Net farm income hit $91.3 billion in 2010, more than 30 percent above the average of the previous decade. The U.S. Department of Agriculture projects profits of $114.8 billion this year—another record.
Prices for most grains, from wheat and sorghum to sugar beets, have spiked, with corn—America's No. 1 cash crop, accounting for 40 percent of all production—serving as the pacesetter. Corn, which hovered in the $2 per-bushel range for years, recently fetched $6.50—not quite as high as earlier this year, but still plenty healthy.
Expectations that today's high commodity prices represent more than a momentary blip have fueled a run-up in farmland values the likes of which has never been seen.
"Land is priced to perfection right now," says Ernie Goss, an economist at Creighton University in Omaha. "Yields are strong, commodity prices are strong and the dollar is weak, which fuels exports."
Here in Yellow Medicine County, one of the top 10 corn-producing counties in the nation, property that fetched $2,500 per acre in 2005 is now going for as much as $6,500. "When commodity prices shot up last fall, we saw the price of land rise $1,500 an acre in three or four months," Lindholm says, shaking his head. "People got very optimistic about the potential profitability."
The story is the same across the nation's heartland. Farmland prices have doubled in Nebraska, and nearly tripled in some parts of Iowa. One parcel of land in the northwest part of the Hawkeye state recently went for a jaw-dropping $17,000 per acre, compared to just north of $5,000 three years ago.
Will corn prices live up to the implied promise of those land values? For lenders in the Corn Belt, the question is a source of constant debate and worry.
Michael Swanson, an agricultural economist with Wells Fargo & Co., says that in normal times, farmland goes for about five years worth of corn production. "When things get wild, it hits eight to 10 years of production," he says. "Some of what we're seeing now is above that level."
At Great Western Bank in Mt. Ayr, Iowa, farmland prices were the focal point of an October management retreat. "When we look at global population growth and the demand for food, we think it has staying power," says Kim Greenland, the $8 billion-asset bank's CEO. "This is income-producing land. It's different from residential or commercial real estate."
Other bankers aren't so sure. "It feels very bubblish," says Jeff Plagge, president of $1.3 billion-asset Northwest Financial Corp., a three-bank holding company in Arnolds Park, Iowa. "You can't look at that kind of price inflation in such a short time period and not have caution."
William Isaac, chairman of the Federal Deposit Insurance Corp. during the 1980s farm crisis, notes some striking similarities between the setup to that painful crash and the macroeconomic conditions of today, including loose monetary policy, soaring commodity prices and a weak dollar that encourages exports. "All of those things that happened in the 1970s are happening today," he says. "We don't know at this point if it's a bubble, but it's sure starting to feel like one."
Regulators are edgy. Both the Federal Reserve and the FDIC have sponsored conferences recently to discuss soaring farmland values, and what the nation's 1,500 ag banks—those with more than 25 percent their loan book devoted to farming—can do to prevent a replay of the 1980s when farmland values collapsed, causing roughly 300 bank failures across the Midwest.
At a March risk-management symposium entitled "Don't Bet the Farm," Sheila Bair, then the FDIC's chairman, told attendees, "While we don't see a credit problem in agriculture at this time, the steep rise in farmland prices ... creates the potential for agricultural credit problems down the road. We'd like to avoid that." (Bair stepped down in July.)
This concern has led to some testy bank examinations in rural America, as regulators—mindful of the 1980s and chastened by the regulatory shortcomings exposed by the more recent mortgage crisis—press ag banks to reduce their exposure.
"We have the same discussion about credit concentrations every time the examiner comes in," says Bill McQuillan, chairman of CNB Community Bank, a $21 million-asset ag lender in Greeley, Neb. About 15 percent of CNB's loan book is tied directly to farmland, while another 35 percent is for farm operating expenses and equipment.
"We're an agricultural bank, so there's not a lot we can do about it," other than underwrite loans conservatively, McQuillan says. "We're not going to go out and get exposure to out-of-market loans. So we stick with what we do, and discuss it with the examiner."
Lindholm says he's been able to successfully deflect regulator concern, thanks to his company's long history of low loan losses. About 60 percent of the loan book at Granite Falls Bank is related directly to agriculture, and another 15 percent to agribusiness. He'd like to diversify more, but there's only so much a community banker surrounded by cornfields 100 miles in every direction can do.
"We measure our diversification within agriculture," Lindholm says. "We can't decide ahead of time what the mix will be. When you're a community bank, you lend for what the customers in your area need, and try to underwrite it in a way that makes it safe."
For now, there's no denying the prosperity in Lindholm's community. Sitting in a clean, efficient corner office with a ground-level view of Prentice Avenue, the town's main drag, Lindholm—clad in jeans and a tie-less white shirt with "GFB" embroidered on its breast—punches numbers into an old-style desk calculator to illustrate the point.
The typical farmer in his market owns or rents 1,000 acres, about half devoted to corn, the other half to soybeans. The soybeans are a break-even proposition, but planting them in a rotation recharges the soil and boosts the yields for corn, the big-money crop.
At an average yield of about 160 bushels per acre, $6-per-bushel corn grosses $960 per acre. Take out direct costs of $400 and, since farmers often rent at least some of the land they work, $250 in "cash rent" (what a landlord farmer typically charges to farm his land each year). The net is $310 per acre. "That's more than $150,000 in profit from corn," says Lindholm. "That's a banner year."
Wes Erickson, a good-natured farmer with overalls and calloused hands, is among those sharing in the bounty. He farms 2,200 acres just outside of Granite Falls, and on a recent fall day was in the field harvesting in his GPS-guided combine decked out with computers that provide real-time information on his acre-per-hour rate, yields per acre and water content of his corn.
Erickson's harvest looks to be down a little—his computer is showing average bushel-per-acre yields in the 140s —thanks to a wet spring and dry August. And the cost of inputs, such as fertilizer and seed, are on the rise. "Everybody wants a bigger piece of the pie," he laments.
Even so, he'll make good money from this harvest, in part by storing much of it in a massive shed until next July, when the remnants from this fall's harvest start to run out. He plans to use Lindholm's bank to help bridge the gap. "I need some help to get from point A to point B, and they've always been there," Erickson says.
Lindholm has shared in some of his customers' success. Granite Falls Bank had a return on assets of 1.5 percent in the first half of this year, compared to an average of 0.57 percent for all banks with assets of between $100 million and $1 billion, and net income is up about 90 percent from the same period in 2007, according to FDIC data.
Lindholm says things could be better if he wasn't forced to live up to various regulatory mandates meant more for Wall Street banks than for Main Street ones. His four-branch banking empire employs 45 people, and there's not much room on the payroll for additional staff to meet all of the new requirements.
"Our drive-up teller, Jennifer, is our BSA officer," he explains with a wry smile. She relies on seminars and webinars to get up to speed, and checks a list from the Treasury Department's Office of Foreign Assets Control "to see if terrorists are opening up accounts here," taking time from other tasks.
"There's quite a bit of frustration" with the latest round of compliance costs and hassles, Lindholm adds. "This is small-town USA. I don't need Washington to keep me honest. All I need is a half-dozen people in town talking bad about me, and a few customers threatening to leave, and it will solve the problem."
He'd also be better off if loan demand would rise to normal levels. Cash-rich farmers, it turns out, don't need to borrow as much. "The name of the game here is net interest margin," he says. "We love to lend money, and we love to get paid back. But we need more loan demand to do really well."
It's a common lament. While ag banks have seen the lowest net chargeoffs of any category tracked by the FDIC—just 0.33 percent of total loans in the first half of the year—lending volume is down. Total farm loans fell nearly $2 billion, to $125.5 billion, between December and June, FDIC data shows.
"These are damned near the best of times for the farm economy," says John Blanchfield, head of the American Bankers Association's Center for Agricultural and Rural Banking. "But it's not always trickling down to the banks."
Then again, it could merely be a sign of wise restraint by bankers who have been here before. That's certainly part of the story with Lindholm, who joined his father's bank in nearby Clarkville in the late 1970s, and struggled through the 1980s farm crisis with everyone else.
In 1996, Lindholm and his wife, Mary Jane, bought Granite Falls Bank, which then had just $22 million in assets. In 1999, they purchased the family's controlling stake in F&M State Bank of Clarkville. Five years later, they bought out remaining family members and formed a holding company to oversee both banks.
Today, lessons from the 1980s, when both corn and farmland prices crashed, are never far away. Lindholm serves as a financial counselor for many customers, challenging assumptions and advising them to build capital for a potential rainy day.
Lindholm's conservative underwriting on anything involving farmland serves as a rudder for his customers. In fact, he really won't look at the market price at all, giving little significance to the commonly used loan-to-value measurement. "This land is an earning asset, and the LTV ratio isn't nearly as relevant as the cash flow or debt-service capacity. We don't want the payments to be more than the income generated," Lindholm says.
"Right now," he adds, "we're only lending $1,500 to $2,000 on $6,500-an-acre land."
Not everyone understands the rationale, and conversations with customers can get intense and personal. "We'll do the math with them," he says. "If you buy that land, here's what your debt across all your land will look like. Does that look rational?"
Worst-case scenarios are part of the worksheet as well: "If you had a crop failure or commodity prices drop, how bad could it get?" Lindholm will ask. "What we really need to know is, what happens if things go to hell in a handbasket?"
Threats to the Corn Belt's recent boom loom everywhere, and everybody around Granite Falls knows it. Corn is a global market, and any one of a half-dozen things beyond anyone's control—ranging from a European debt crisis or a trade impasse with China to a rise in the value of the dollar or a change in the weather—could cause prices to fall rapidly.
In an analysis late last year, the FDIC cited every potential danger imaginable—both the speculative and the concrete—as it cautioned lenders against overconfidence and recommended they limit their concentrations, both directly and through third parties. But so far overconfidence is one thing few ag bankers seem to have in abundance.
In the past year, corn dipped briefly to $4 per bushel, before rebounding to $7. The swings are unsettling for farmers who grew accustomed over the years to prices fluctuating between roughly $1.80 and $2.30.
"There's a little bit of fear out there, because of the volatility," says Craig Bakkelund, Granite Falls Bank's vice president. "The goods can be really good, but the bads can be really bad."
For corn farmers, one threat is the potential for a scaling back of a government mandate on production of renewable biofuels. The mandate tightened up the supply of corn by diverting 5 billion bushels into ethanol, Wells Fargo's Swanson says. (That's 38 percent of the nation's total corn output.)
This clearly has been a boon for farming communities like Granite Falls, driving up prices of their key product. But long-term subsidies and tariff protections are set to end this year, and the mandate—while it appears safe for now—faces stiff political opposition, including from livestock farmers, who are big buyers of corn. "It was an artificial policy decision, and those can be reversed," Swanson says.
Farm bankers also keep a watchful eye on trade negotiations. Exports account for 2 billion bushels of production, and have grown in recent years. A trade spat could cut demand significantly, causing commodity and land prices to fall.
Swanson believes that over time "global demand is real and is going to grow," validating some of the price appreciation. But it's likely to be a stormy ride, and he worries that many farmers aren't ready for a prolonged downburst.
"This isn't Malibu, with sun and a narrow band of predictability," he says. "This is continental Midwest weather volatility, and many farmers have simply not prepared themselves for two bad years of pricing; $3.50 corn, which four or five years ago would have been wonderful, is now going to be bankrupting."
Lindholm and other ag bankers are doing what they can to help their customers and communities avoid that scenario.