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Betting the Farm: Former FDIC Chair Isaac Fears Another ‘Ag’ Bubble Brewing

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

The housing bubble may have burst but another American real estate boom rolls on: Since 2000, U.S. farmland values have risen by 58% after inflation, according to the FDIC. And since 2003, they've risen by over 10% annually

Surging agriculture prices, a weak dollar, fear of financial assets and rising global demand for food have all contributed to this boom. The question now is whether it's becoming a bubble.

"It's very reminiscent of period we had in 1970s," when farmland prices surged 350% in less than a decade, says Bill Isaac, former FDIC chairman and current chair of Fifth Third Bancorp. "I'm hoping we don't let it get that far."

At an FDIC symposium in Washington this week, Isaac discussed the "worrisome trends and similarities between the 1970s and today," including: loose fiscal and monetary policies, massive deficits creating inflation, and a weak dollar spurring demand for agricultural exports.

When Paul Volcker became Fed chairman in 1979, he had a mandate to break the back of inflation. In the process, Volcker burst the farm bubble: foreclosures skyrocketed as land prices tumbled and about 300 farm banks failed.

"It was very painful," Isaac recalls. "I hope we don't go through another boom-bust cycle."

The FDIC symposium was designed to avoid such an outcome by alerting bankers to the potential risk of their ag-related exposure. Although the 100 largest banks account for about 25% of farm-related loans, Isaac says he's more worried about smaller, less diversified community banks in agricultural producing regions.

Suggesting regulators and bankers have learned the lessons of the 1970s farm boom and the more recent residential housing bubble, Isaac is hopeful this cycle will be less painful. That is, "as long as we don't let the bubble get out of hand," he says. "If we let bubble get out of hand, all bets are off. "

And as long as Ben Bernanke is at the helm of the Fed, the 'smart money' is going to keep betting (on) the farm.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com