WASHINGTON (MNI) – Kansas City Federal Reserve Bank President
Thomas Hoenig said Thursday he will be “watchful” about bad loans
potentially made by farm banks, and expressed concern distortions again
seen in financial market could take the agriculture sector and the
broader economy off guard once again.
In testimony prepared for a Senate Agriculture Committee hearing,
Hoenig said high liquidity and unusually low interest rates have led to
a run-up in farmland values, while high commodity demand fueled
increased profits and “girded” the rural financial system.
“History has taught us that it is nearly impossible to determine
how much of the farmland boom may be an unsustainable bubble driven by
financial markets and how much results from fundamental changes in
demand and supply conditions,” Hoenig said.
He said he is concerned how the sector will respond “when financial
markets return to more-normal interest rate conditions,” which would
lead to falling revenues and land values.
“Fortunately, the industry entered this period with a relatively
strong balance sheet. Farm leverage ratios are at historic lows, and
agricultural banks are well capitalized,” he said, adding that “farm
operators and banks have strengthened their risk-management practices.”
“Nevertheless, I follow the basic lesson that bad loans are made in
good times, and I remain watchful,” Hoenig said.
He cautioned that “my nagging concern remains that current
distortions in financial markets are increasing the risk that imbalances
in asset markets will catch agriculture – and the U.S. economy more
generally — by surprise once again.”
** Market News International Washington Bureau: 202-371-2121 **
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